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
We would like to let you in on a dirty little secret. This blog is a money-making operation.
Yup. We're as surprised as you are. But don't worry. So far we have been investing all proceeds back into legal scholarship by supporting the annual International Conferences on Contracts like the one this past February in Fort Worth. With the added revenues derived from the re-design of the blog and the re-organization of the Law Professor Blog Network, of which we are a part, we hope to contribute in a more substantial way in years to come.
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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]
Monday, August 26, 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 posts this week. All of this made possible through the organizational genius of Jean Braucher, who recruited the participants in this symposium. So we at the blog are all very grateful to her.
Gillian K. Hadfield is the Richard L. and Antoinette Schamoi Kirtland professor of law and professor of economics at the University of Southern California. She studies the design of legal and dispute resolution systems; contracting; and the performance and regulation of legal markets and the legal profession.
Her recent publications include “What is Law: A Coordination Model of the Characteristics of Legal Order” (with Barry Weingast, Journal of Legal Analysis 2012); "The Dynamic Quality of Law: Judicial Incentives, Legal Human Capital and the Adaptation of Law (Journal of Economic Behavior and Organization 2011); "Legal Infrastructure for the New Economy” (I/S: Journal of Law and Policy for the Information Society 2012) and "Higher Demand, Lower Supply? A Comparative Assessment of the Legal Resource Landscape for Ordinary Americans" (Fordham Urban Law Journal 2010).
Professor Hadfield holds a B.A.H. from Queen’s University, a J.D. from Stanford Law School and Ph.D. in economics from Stanford University. She served as clerk to Chief Judge Patricia Wald on the U.S. Court of Appeals, D.C. Circuit. She has been a visiting professor at Harvard, Columbia and NYU law schools, a fellow of the Center for Advanced Study in the Behavioral Sciences at Stanford, and a National Fellow at the Hoover Institution. She is a member of the American Law Institute, director of the American Law and Economics Association and the International Society for New Institutional Economics and past president of the Canadian Law and Economics Association. She serves on advisory boards for the Hague Institute for the Internationalisation of Law, LegalZoom, Pearl.com, and Educating Tomorrow’s Lawyers, and on the Editorial Committee of the Annual Review of Law and Social Science.
More of Professor Hadfield's publications can be found here.
Jonathan Lipson is the Harold E. Kohn Professor of Law at Temple University's Beasley School of Law. Professor Lipson teaches commercial, corporate and bankruptcy law courses, including a deal-based simulation. From 2010-2012, he was the Foley & Lardner Professor of Law at the University of Wisconsin Law School.
His research focuses on business failure systems, with a particular emphasis on the role that information forcing rules play in influencing outcomes. He has written a number of articles about the informational aspects of the U.S. secured credit system, the bankruptcy system, and the role that lawyers play in designing and implementing transactions under the risk of financial failure. He is an occasional empiricist, having authored the first qualitative empirical study of lawyers’ practice of writing third-party closing opinions (which was selected for presentation at the 2005 Yale/Stanford Junior Faculty Forum). He has also developed a unique data set on the use of examiners in large Chapter 11 bankruptcy cases.
He has a side expertise on constitutional issues in bankruptcy. He has authored papers on, among other things, the Catholic diocese bankruptcies, sovereign immunity defenses in bankruptcy, and the larger structural questions presented by the Bankruptcy Clause of the United States Constitution.
His work has appeared in, among others, the UCLA Law Review, the Boston University Law Review, the Notre Dame Law Review, the Business Lawyer, the University of Southern California Law Review, the Washington University Law Review, the Minnesota Law Review and the Wisconsin Law Review .
More of Professor Lipson's publications can be found here.
Below are links to last week's posts:
We look forward to another lively week of contributions.
Thursday, August 22, 2013
This is the fourth 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.
One Contracts Professor’s Preference for State Court Decisions
In the essay that I contributed to Revisiting the Scholarship of Stewart Macaulay: On the Empirical and the Lyrical, I gave vent to the frustration I experienced over the years reading decisions written by the 7th Circuit Judges Richard Posner and Frank Easterbrook. Stewart wrote to me recently and in two sentences, appropriately lyrical, summed up the source of my frustration: “In theory, of course, the court applies state law in a diversity situation. About the one thing that you can expect is that Judges Posner and Easterbrook will be off on a frolic of their own.”
I have a healthy respect these days, and a strong preference for, the decisions of state courts. I try to use the best of these to teach contract law to my students. I admire the tenacity of state courts that insist, for example, that the commentary to the UCC matters in interpreting that statute. See e.g. Simcala Inc. v. American Coal Trade, Inc. 821 So.2d 197 (Ala. 2001) (the word “center” in comment 3 to UCC section 2-306 means something when used to describe the way a stated estimate limits the “intended elasticity” of an output or requirements contract).
I am particularly gratified by the persistence of courts that have used the unconscionability doctrine to invalidate boilerplate arbitration clauses. Implicit in these cases is a duality. Oppression exists on two levels. The terms of the transactions are oppressive and unconscionable, and the terms of the arbitration agreement are oppressive. Two cases I discussed previously at the 8th Annual International Contracts Conference at Texas A & M University Law School.
In Brewer v. Missouri Title Loans, 364 S.W.3d 486 (Mo. 2012), the Missouri Supreme Court describes the terms of a loan agreement. Ms. Brewer borrowed $2,215 and paid back $2000, at which point she had reduced the principal balance on the loan by $.06. The interest rate on that loan was 300%. Ms. Brewer brought suit under the Missouri consumer protection statute, the Missouri Merchandising Practices Statute.
In Tillman v. Commercial Credit Loans Inc., 655 S.E.2d 362 (N.C. 2008), Ms. Tillman and Ms. Richardson, the named plaintiffs in a class action, purchased single premium credit insurance from a lender. Within a year the North Carolina legislature made this species of loan illegal, but the statute was not retroactive. Ms. Tillman and Ms. Richardson sued under the North Carolina Unfair and Deceptive Trade Practices Act. The North Carolina Supreme Court found the arbitration clause in the contract, which barred class actions, unconscionable in a 3-2-2 decision.
When the United States Supreme
Court vacated the decision in the Brewer
case and remanded it to the Missouri court for reconsideration in light of A.T.& T. Mobility LLC v. Concepcion,
131 S. Ct. 1740 (2011), Chief Justice Richard Teitelman
, responded that
the unconscionability doctrine in Missouri law was not an “obstacle to the
accomplishment of the act’s objectives.”
The arbitration agreement was unconscionable because there was expert
testimony that no consumer would pursue a claim against the Title Company. The cost was too high. The Tillman
court made much the same point. Of the
68,000 loans that Citifinancial made in North Carolina, no borrower ever
pursued arbitration of a claim.
Citifinancial on the other hand, had reserved its right to go to court
and had exercised that privilege over 3,000 times in civil suits and
foreclosure actions. The Tillman court also provided information
about the actual cost of arbitration, a factual discussion that is missing in a
lot of these cases. It turns out that
arbitration is cost prohibitive for most low income consumers.
Exploitive or predatory contracts saturate the market for credit, housing, furniture for the least well off in our society. The Montana Supreme Court recently held a payday loan and its arbitration provision unconscionable. Kelker v. Geneva-Roth Ventures, Inc., 303 P.3d 777 ( Mont. 2013)(780% APR was violation of Montana Consumer Loan Act) If the U.S. Supreme Court grants certiorari in Kelker, the decision in that payday loan case will probably meet the fate of its progenitors, Casarotto v. Lombardi, 886 P.2d 931 (Mont. 1994)(Casarotto I) and Casarotto v. Lombardi, 901 P.2d 596 (Mont. 1995)(Casarotto II). Justice Trieweiler maintained in Casarotto I that the Federal Arbitration Act had not pre-empted state laws addressing arbitration because the federal statute had not addressed every aspect or possibility with respect to arbitration agreements. In Casarotto II he argued that the U.S. Supreme Court’s decision to strike down an Alabama statute that made pre-dispute arbitration agreements unenforceable was irrelevant to the decision in Casarotto I. He was reversed in an opinion written by none other than Justice Ginsberg.
Justice Terry N. Trieweiler, the twice rebuked but unrepentant Montana Supreme Court jurist, actually wrote three Casarotto opinions. He penned a special concurring opinion in Casarotto I to address “those federal judges who consider forced arbitration as the panacea for their “heavy caseloads” and to single out for criticism Judge Bruce M. Selya, First Circuit Court of Appeals, who called the prevalence in state courts of “traditional notions of fairness” an “anachronism.” 886 P.2d at 940. Justice Trieweiler’s rejoinder was that some federal judges are arrogant. I think of it as hubris.
The number of cases challenging arbitration agreements has not diminished over time. I can think of at least two reasons for this phenomenon. One is ever expanding disparity in wealth and power in the United States in this post-industrial society. There are very few ways individuals can challenge those who have power over them or expose what they feel to be an injustice that has been done to them. We are conditioned to believe that there is “equal justice under the law” and to believe that a citizen may seek redress in court. The second reason is the failure of federal courts to recognize that the FAA is indefensible when it is applied in consumer cases. That was the subject of the last series of blog posts discussing Margaret Radin’s book, Boilerplate. The FAA is a statute frozen in time, applied to transactions almost ninety years after Congress held those hearings on the resistance of state courts to arbitration and used to enforce arbitration “agreements” in contracts that were not even dreamed of when the FAA was passed -- online, clickwrap contracts such as the contract in Kelker. Contract defenses that police agreements where there is no real consent and no real bargaining are rendered impotent by the FAA. It does not matter if Certiorari is denied in Kelker, because the 9th Circuit has already used a pre-emption argument to defeat the Montana court’s use of “reasonable expectations” and unconscionability doctrines to invalidate arbitration provisions. Mortensen v. Bresnen Communications, LLC, 2013 U.S. App. Lexis 14211.
This past weekend I had the pleasure of meeting the judge who wrote the plurality opinion in the Tillman case, Justice Patricia Timmons-Goodson (pictured), who retired from the North Carolina Supreme Court in December 2012. I did not plan this meeting. It was completely serendipitous. I was looking for the meeting room where the Task Force on the Future of Legal Education was discussing the end of law school as we know it. I asked her for directions, and then I glanced at her name tag. It took me a moment to realize who she was. I was told by Judge James Wynn, who is now on the 4th Circuit U.S. Court of Appeals, but who once served with Judge Timmons-Goodson on the North Carolina Court of Appeals and the Supreme Court, that she was a recent recipient of the Legend in the Law award at Charlotte School of Law.
I knew that Justice Timmons-Goodson was a black woman. I looked for background information when I decided to write about the case. I knew, courtesy of North Carolina’s Lawyers Weekly, that two lawyers from Raleigh, John Alan Jones and G. Christopher Olson, obtained a judgment in Tillman and two companion cases in the amount of $81.25 million. Of the borrowers represented in the Tillman case, 759 received approximately $31,291 each. Another 9,670 received $544 each.
Taking the admonition of Stewart Macaulay seriously, striving to do something that looks like empirical research, I asked Justice Timmons-Goodson if she would consent to an interview. She hasn’t agreed yet, but I hope she will. I would like to know more about the process that she used to reach a decision in the Tillman case; how she persuaded enough of her colleagues to agree that the contract and the arbitration clause were unconscionable, even if two of them relied on a “totality of the circumstances” analysis that they thought sufficiently different from her opinion to merit a separate concurring opinion. Two justices signed her opinion relying on substantive unconscionability; two joined in finding the arbitration clause unconscionable but stressed the importance of deference to the fact-finding of the trial judge under a “totality of the circumstances” approach, and two justices dissented.
The Justice writing the dissenting opinion, appears to believe that the unconscionabiity doctrine is somehow illegitimate. He noted that it had never been used in North Carolina to invalidate a contract or a term in a contract. If I do interview Justice Timmons-Goodman, I will ask her about her reaction to the most recent U. S. Supreme Court decisions. She has herself written about the importance of state court judges at every level, particularly in the trial courts.
I am not sure that she would call her own acts as a justice on the Supreme Court “resistance.” She might simply say that logic and adherence to an ethic of principled decision-making impelled her to write the decision in Tillman as she did. I cannot be sure that she believes, as I do, that the drafters of the FAA never intended to completely pre-empt state law, especially those contract doctrines that are designed to control avarice and unscrupulous behavior. I do think, however, she will enjoy discussing the decisions of Justice Trieweiler.
[Posted, on Deborah Post's behalf, by JT]
Wednesday, August 21, 2013
This is the third 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.
Kate O'Neill's is Professor of Law at the University of Washington School of Law. Her principal interests are contracts, copyright, legal rhetoric, and law school teaching.
These essays present enlightening, provocative, and well-written analyses of relational contract theory, contract doctrine, legal practice, and social justice. The editors have sequenced and grouped them skillfully so that the reader can clearly see how the authors’ ideas intersect and diverge. As a result, the collection is more than its parts.
I want to draw readers’ attention to a problem the collection suggests but doesn’t address directly. What are we going to do about the contracts course in law school?
Several essays suggest, and Robert Scott’s expressly argues for, an emerging consensus that Macaulay’s original insights remain valid and are foundational for both law & economics and law & society theorists and that these warring camps may have more in common than either has yet recognized. If Scott and Macaulay are right, then I would wager that most contract courses not only fail to reflect the consensus but camouflage its most promising lessons.
The consensus seems to include two major points of agreement. First, unmessy doctrine can be handy (“Messy,” of course, was Macaulay’s description of much contract doctrine). Some “sophisticated” contracting parties should be able to make binding commitments on precisely the terms that they negotiate and, in case of dispute, they should be able to limit a judge’s interpretative discretion to alter their allocations of risk. In particular, they should be able to preclude the judge from resorting to “context” to alter the (presumably) plain meaning of the terms.
Second, consumers and employees should not necessarily be bound by all of the commitments purportedly imposed upon them by adhesion documents. Here, we can see fruit borne from Macaulay’s distinction between the real deal and the paper deal. Terms that are reasonable, typical, or expected are part of the deal; terms that are not are not. The expected nature of the relationship dictates the real contract terms; the paper contract terms do not necessarily govern the relationship. We are freed from the mutually exclusive and entirely fictional alternatives that either a contract was formed on the paper terms or it was not formed at all.
On the other hand, the collection makes clear that a fundamental policy issue remains contested especially in the consumer context – how much contract law should intervene in the market. The familiar alternatives are reflected: 1) let the market discipline bad actors even if there are a few casualties before the market works its magic because there is no agency more capable than the market in determining best (read, efficient?) practices; 2) let judges intervene to strike down bad terms – especially those that limit access to courts and class actions – because doing so will hasten market discipline of bad actors and will also relieve hardship in at least a few cases; or 3) regulate certain kinds of terms out of existence.
All the authors think that empirical data could help resolve the policy dispute. Edward Rubin, in particular, suggests that we think of contract law as a management tool. If we were to focus on whether the tool works well to achieve whatever objectives we set, then the legal system could essentially be taught to treat empirical evidence as intrinsic to the development of law. This is encouraging stuff. A systemic devotion to empiricism within the legal system might enable us, and the body politic, to clarify debates about what laws are fair and efficacious.
So far, so good, but here is the question that keeps troubling me. If we all are relationists and empiricists now, and we could use data to make contracting law and practice both fairer and more efficient (or whatever other goals we might conceivably agree upon), what and how we should teach law students?
Macaulay has taught us that contract law has relatively little explanatory power for many of the actual practices involved in the formation, performance, and modification of exchanges, or even the practices involved in resolving disputes. Serious attention to the nature of exchange relationships makes it hard to characterize contract law as unified, coherent and consistent or if it is unified theoretically, the unity operates at such a high level of abstraction that will matter little to judges or practitioners.
We praise these and other insights from empiricism both for what they tell us about law and society now and what they might teach us about alternatives. Yet most lawyers and judges plod on, oblivious or dismissive. Are we in part responsible? Look at our casebooks, listen to our classroom discussions! Traditional doctrinal analysis is alive, well, and I suspect dominant. Economic analysis “lite” has crept in, but attention to empirical methods, much less data on context or consequences, is scant. I suspect that even those of us who assign “law & society” contracts casebooks, like the ones edited by Macaulay and Deborah Post, still devote the bulk of class time to doctrinal analysis.
Perhaps this must be. Perhaps doctrinal analysis is our discipline’s unique identifier and must be taught first because it is foundational; perhaps we need to train litigators to understand the elements of a claim for breach; perhaps there is some utility in using the same basic case method in all 1L courses; or perhaps we are simply boxed in by student expectations, bar examiners, tradition, or confusion about what else to do?
Although there certainly are barriers to changing what and how we teach, I wonder if the core problem is that the work that needs to be done is profoundly interdisciplinary, challenging, and time-consuming. Many of us lack the skills to do it alone, and the scholarship, promotion standards, and instructional traditions at many law schools still make collaborations difficult.
Contracts teachers may alert law students to Macaulay’s insights, but I don’t think we give students sufficient tools to help clients and or work effectively on big systemic problems. Stewart might say that’s because we kinda like the mess the way it is.
[Posted, on Kate O'Neill's behalf, by JT]
Contract Law – 2nd Edition
By John Cartwright
This book gives an introduction to the English law of contract. In this new and fully updated edition the book retains the primary focus of the first edition: it is designed to introduce the lawyer trained in a civil law jurisdiction to the method of reasoning in the common law, and in particular to the English law of contract. It is written for the lawyer-whether student or practitioner-from another jurisdiction who already has an understanding of a (different) law of contract, but who wishes to discover the way in which an English lawyer views a contract. However, setting English contract law generally in the context of other European and international approaches, the book forms an introductory text for the English student, who can see not only how English contract law works but also get a glimpse of different ways of thinking about some of the fundamental rules of contract law. After a general introduction to the common law system-how a common lawyer reasons and finds the law-the book explains the principles of the law of contract in English law covering all the aspects of a contract from its formation to the remedies available for breach, whilst directing attention in particular to those areas where the approach of English law is in marked contrast to that taken in many civil law systems.
John Cartwright is Professor of the Law of Contract at the University of Oxford, Tutor in Law at Christ Church, Oxford, Professor of Anglo-American Private Law at the University of Leiden, and a Solicitor.
August 2013 362pp Pbk 9781849464796
RSP: £25 / €33 / US$50
20% DISCOUNT PRICE: £20 / €26.40 / US $40
Order Online in the US
If you would like to place an order you can do so through the Hart Publishing website (link below). To receive the discount please mention ref: ‘CONTRACTSPROFBLOG’ in the special instructions field. Please note that the discount will not be shown on your order but will be applied when your order is processed.
Order Online in the UK, EU and Rest of World
If you would like to place an order you can do so through the Hart Publishing website (link below). To receive the discount please type the reference ‘CONTRACTSPROFBLOG’ in the voucher code field and click ‘apply’.
UK, EU and ROW website: http://www.hartpub.co.uk/BookDetails.aspx?ISBN=9781849464796[JT]
Tuesday, August 20, 2013
This is the second 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.
Alan Hyde is Distinguished Professor and Sidney Reitman Scholar at Rutgers University School of Law, Newark, where he writes mostly about labor, employment, and immigration law.
Stewart Macaulay, System Builder
I’ve often wondered whether Stewart Macaulay would have had even more influence if he had used his social science research into business practice to construct theories and systems. In most of his writing, Stewart used empirical research to debunk. Often, there is a specific target. For example, Stewart will take on the idea that business professionals want to be sure that the documents they sign constitute contracts that will be enforceable as such in court. As everyone knows (I hope), Stewart’s research showed, so long ago, that people who did deals cared little about formal enforceability. My impression is that most American contracts teachers know this, and ignore it in their actual teaching practice. The typical contracts class probably spends as much time today on the line between unenforceable agreement, and enforceable contract, as it did before Stewart began writing, or was born.
As a public service, I have synthesized the following Counterstatement (First) of Actual US Contract Law in Action, as Given by the Dealmakers of the US, Under the Interpretation of Stewart Macaulay (Tentative Draft No.1). Casebooks may now cite it—I grant permission-- as an alternative approach (though with precisely the same claim to legal authority as the product of that Institute in Philadelphia, the name of which I do not choose to recall, that is so often treated by contracts teachers today as if it were the Civil Code). Authors can argue with it. For sometimes it takes a system to beat a system. For convenience, I will synthesize this Counterstatement from Stewart’s fabulous casebook (with Kidwell, Whitford, Braucher, and sometimes others), Contracts: Law in Action, because I teach from it every year and thus get the benefit of hearing Stewart’s voice in my head as I teach.
Counterstatement (First) of Actual US Contract Law . . .
Chapter One: Remedies. [Since this is a Stewart Macaulay Counterstatement of Actual US Contract Law, it naturally begins with Remedies]
Section 1: Remedies expected and demanded for failures to meet promises shall reflect the expectations of the parties based on the norms of their industry, and their sense of fairness. Remedies shall not depend on technicalities of formal enforceability as discussed in Chapter Two of this Counterstatement, and in no case shall refer to decisions of courts of law except insofar as these have been incorporated into business norms, which, if parties are rational, would be never. For example, if a machine sold doesn’t work, “this is not something any lawyer could handle without putting you [Seller] out of business. This must be handled on a business basis by a salesperson and the person who bought the machine. We don’t look for legal loopholes to avoid obligations like this. After all, you are selling reliability and your reputation gets around.”
Section 2: Buyer’s cancellation of an order
- A Buyer under a formal or informal arrangement for the sale of goods, whether or not a law court would find it to be a “contract,” may cancel an order when its needs have changed.
- In such a case, the Buyer shall be liable to the Seller for cancellation costs, defined as expenses incurred by the Seller that have been turned to waste by Buyer’s cancellation. Such expenses include completed product scrapped or unsellable after Buyer’s cancellation, and raw materials purchased in order to fulfill Buyer’s order but that cannot be salvaged.
- A seller that sues a cancelling Buyer for profits it thinks it would have made from Buyer’s purchase is probably nuts, especially where that Buyer is a consumer. Such a Seller that sues for lost profits can hardly expect people to continue to deal with it.
- Lawyers can call cancellation of an order “breach of contract,” if they like, but that doesn’t mean that their clients will agree with this characterization.
- On notification by Seller that it is unable to fulfill Buyer’s order, Buyer may purchase any reasonable substitute and bill Seller for the difference.
- If Seller is going to be late, it should try to work things out with the Buyer. If Buyer had enough notice that the Seller would be late, and didn’t do anything to protect itself, nobody is going to give Buyer any damages.
Section 4: Miscellaneous remedies
- All parties understand that failure to keep your word in business is likely to result in people saying bad things about your reputation.
- When things go wrong, try to work things out with your contractual partner. This probably means keeping the lawyers out. “If business had to be done by lawyers as buyers and sellers, the economy would stop. No one would buy or sell anything; they’d just negotiate forever.”
- The party that drafts the documents will probably disclaim any liability, in vague, illegible gobbledy-gook, and courts that are there to protect wealth and privilege will probably let them get away with it, so really all this study of remedies is somewhat beside the point.
Chapter Two: Enforceability [like you care, anyway]
Section 5: Enforceability of promises and arrangements made in family settings
Courts should not hesitate to enforce promises made by one family member to another, if the situation permits the court to play a useful role in sorting things out and restoring harmony, which is rare.
Section 6: Contract formation in general
- Honest people keep their promises without worrying about any technicalities of contract formation. The so-called law of offer-and-acceptance is just a bunch of loopholes that lawyers use to get people out from promises that they plainly made but now feel like getting out of.
- When the parties’ documents do not appear to create what courts think is an enforceable contract, for example by reserving in one party such freedom of action as to raise the question whether it is even committing to anything, try to imagine that maybe they didn’t intend judicial enforcement, preferring to work things out.
- The idea that people have no commitments to each other, and then, after one magic moment (called contract formation), do, is just magical thinking. People should act like moral adults and work out the issues between them, without taking refuge in legal mumbo-jumbo, which is nearly always a very hostile step to take and interpreted by others as such.
Section 7: Consideration
There is no such doctrine. A plaintiff who seeks specific performance of a contract to sell valuable real estate in consideration of one peppercorn (tendered) has a great deal of explaining to do.
Section 8. Excuse.
If you owe $50,000 to a bank, and can’t pay, you are in trouble. But if you owe $50 million to a bank, and can’t pay, the bank is in trouble.
You get the idea, anyway. It’s time for Stewart Macaulay fans to move beyond mere debunking. That Institute in Philadelphia should support the Counterstatement (First) of Actual US Contract Law in Action, as Given by the Dealmakers of the US, Under the Interpretation of Stewart Macaulay. But who should be Chief Reporter?
[Posted, on Alan Hyde's behalf, by JT]
Monday, August 19, 2013
This is the first 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.
Jay Feinman is Distinguished Professor of Law at Rutgers School of Law‒Camden.
My contribution to Revisiting the Contracts Scholarship of Stewart Macaulay: On the Empirical and the Lyrical is a chapter entitled “Ambition and Humility in Contract Law.” The chapter focuses on several of Macaulay’s articles in the 1960s in which he presented an organization of the fundamental policies underlying contract law, the structures through which contract law acts, and some policies of the legal system that influence the fundamental and structural policies. The organization encapsulates in a remarkable 2x2 matrix the essential issues of contract law.
Here is the matrix, which separates the substantive policies that contract law serves (market and other-than-market goals) from the ways in which the legal system can realize those goals (through rules or case-by-case adjudication). (As Macaulay recognizes, the elements of the matrix are actually ends of continua rather than discrete categories.)
Generalizing approach (‘rules’)
social (or economic) planning policy
Particularizing approach (‘case-by-case’)
Macaulay’s organization clearly and powerfully expresses the underpinnings and operations of the field. For mainstream scholars, the identification of policies and approaches provides a framework that clarifies analysis in legislation, adjudication, and scholarship. But the matrix also contains the seeds of a critique that demonstrated that contract law is at best badly confused and at worst incoherent and largely ineffective. In that way, Macaulay’s work contributed to critical legal studies’ account of private law through its influence on Duncan Kennedy’s monumental “Form and Substance In Private Law Adjudication,” 89 Harv. L. Rev. 1685 (1976) and other works.
For contract law, the market is the primary social institution, so market goals predominate. Macaulay’s framing of market-promoting goals as primary and market-correcting goals as secondary correctly states the customary objectives of contract law as ambition tempered with humility. But that framing makes apparent why contract law needs to temper its ambition of serving the market with a large dose of humility.
First, the conflicting market and non-market goals need to be balanced, and the measures for doing so are controversial. The case law and literature offer a variety of mechanisms for carrying out this balancing. Courts employ different tropes including avoidance by doctrinal formalism, casual policy analysis, and ad hoc paternalism. The Restatement Second frequently lists factors to be balanced without specifying the techniques of balancing. Economic analysis aims for efficient results, variously defined and sought. In his later reflections on the systematic presentation of contract law policies, Macaulay recognized the inadequacy of these efforts and the difficulty, perhaps impossibility of this balancing process. There he entitles the matrix “The Contradictions of Contract Law” and comments that contract law “inconsistently rests on policies that both promote the market and those that attempt to blunt it.” Macaulay, “Klein and the Contradictions of Corporate Law, 2 Berkeley Bus. L. J. 119 (2005).
Second, the hierarchy and separation between market and non-market goals needs to be established in practice. Consider the choice between a rule-oriented market functioning policy and a case-by-case transactional policy. One of the substantive contract policies Macaulay identifies is self-reliance. In the conception of the market as private, individual, and self-actuating, self-reliance is crucial. Macaulay writes of promoting self-reliance by encouraging or requiring parties to look out for themselves, in a world in which the law will rigidly enforce apparent bargains they have made, through a market-functioning or transactional policy.
But implicit in this construction is the illogic of simply promoting the market by promoting self-reliance through a body of contract law that rewards initiative and punishes dependence. Instead, the law can further self-reliance in either of two opposite ways—by creating a minimal body of contract law that puts parties at risk or an aggressively interventionist body of law that provides parties with security. A body of contract that provides relief from one’s ill-informed or ill-fated promises encourages self-reliant action by assuring that the consequences of action will not be too severe. The risk of intervention or non-intervention in this way protects all economic actors, as all are potentially subject to bad decisions or bad luck, although the weak probably more so than the strong.
Third, as the theoretical conflict about self-reliance illustrates, it is problematic even to attempt to define market and non-market goals as separate. Inherent in the separation is the conception that market goals involve the facilitation of private activity, a process that is distinct from the imposition of public values such as redressing inequality. Private activity is fundamentally individual, whereas public goals are collective. Courts in private law cases are primarily a forum for the adjudication of private disputes; legislatures are the arena in which public goals are primarily enunciated. And so on.
But these dichotomies are exaggerated. There is no institution of the market separate from and preexisting non-market activity, just as there is no private law not constituted by public values. The exchange of goods may be a private activity, but the exchange of goods that the law has made the subject of property and which exchange is enforceable by law is an essentially public activity. Law constitutes the market for reasons of the public good, so supporting the market through contract law is only another way of advancing the public good, and not a particularly distinct way at that.
Because the market is not distinctively private, the hierarchy of market goals and the need for self-reliance in the service of those goals are not evident. The justification for contract law and its rules must rest elsewhere than on a claim that the market is distinctive and distinctively important. And that is a claim that is assumed but seldom justified in the case law or literature. Part of the power of Macaulay’s organization is the way in which it makes clear the great defects of contract law’s ambition.
[Posted, on Jay Feinman's behalf, by JT]
Friday, August 16, 2013
We begin 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 four posts next week. In addition to helping edit the book Jean Braucher has also been instrumental in recruiting participants and shaping this symposium. So we at the blog are all very grateful to her.
This post will serve to introduce next week's guest bloggers.
Jay Feinman is Distinguished Professor of Law at Rutgers School of Law‒Camden. He writes and teaches in contracts, insurance law, and torts. His books include Delay, Deny, Defend: Why Insurance Companies Don’t Pay Claims and What You Can Do About It; Law 101: Everything You Need to Know About American Law; and Professional Liability to Third Parties. His contracts scholarship includes articles on relational contract theory (“The Insurance Relationship as Relational Contract and the ‘Fairly Debatable’ Rule for First-Party Bad Faith,” 46 San Diego L. Rev. (2009); “Relational Contract Theory in Context,” 94 Nw. U. L. Rev. 737 (1999), critical legal studies (“Critical Approaches to Contract Law,” 30 UCLA Law Review 829 (1983)), and formation doctrine (“Is an Advertisement an Offer? Why It Is, and Why It Matters,” 58 Hastings L.J. 61 (2006)). In the AALS, Feinman has served as chair of the Section on Contracts and chair of the planning committee for the contracts conference. At Rutgers, he has served as Associate Dean and Acting Dean of the law school and a member of the Rutgers Center for Risk and Responsibility, and he has received every teaching prize awarded by the university.
Links to many of Professor Feinman's publications can be found here.
Alan Hyde is Distinguished Professor and Sidney Reitman Scholar at Rutgers University School of Law, Newark, where he writes mostly about labor, employment, and immigration law. He is a member of the American Law Institute and consultant to the Restatement of Employment Law. He also teaches contracts and discusses contracts in his books Bodies of Law (1997), Working in Silicon Valley (2003), and articles on covenants not to compete and employment contracts that contracts teachers do not read.
Links to many of Professor Hydes publications can be found here.
Kate O'Neill's principal interests are contracts, copyright, legal rhetoric, and law school teaching. She shares the following biographical details:
I am a professor at University of Washington School of Law. I have been teaching Contracts for about 15 years. I started out, copying my colleagues, by using the Dawson casebook. I had first encountered contracts as a student with a much earlier edition of the same book. I embarrassed to admit that I began teaching contracts without much insight into the subject, and I can’t remember exactly when I first discovered Macaulay and relational contracts theory. I certainly had not encountered them in my own legal education, although my four years of commercial practice did perhaps make me susceptible to their insights. But what a relief they were! I have been teaching from Macaulay, et al., contracts: law in Action for many years now.
If you are interested in why we teach contracts as most of us do, you might enjoy a piece I wrote about Richard Posner’s effect on casebooks and law teaching. Rhetoric Counts: What We Should Teach When We Teach Posner, 39 Seton Hall L. Rev. 507 (2009).
Links to many of Professor O'Neill's publications can be found here.
Deborah Post is Associate Dean for Academic Affairs and Faculty Development and Professor of Law at Touro College Jacob D. Fuchsberg Law Center. She began her legal career working in the corporate section of a law firm in Houston, Texas, Bracewell & Patterson, now renamed Bracewell & Guiliani. She left practice to teach at the University of Houston Law School and moved to New York to Touro Law Center in 1987. She has been a visiting professor at Syracuse Law School, DePaul Law School, and State University of New Jersey Rutgers School of Law Newark. She also has taught as an adjunct at Hofstra Law School, UMass Dartmouth and St. Johns University School of Law. Professor Post has written for and about legal education. Among her most notable publications are a book on legal education, Cultivating Intelligence: Power, Law and the Politics of Teaching written with a colleague, Louise Harmon and a casebook in Contract, Contracting Law, with co-authors Amy Kastely and Nancy Ota. She has been a member of the Society of American Law Teachers Board of Governors for ten years and was co-president of that organization with Professor Margaret Barry from 2008-2010.
Links to many of Professor Post's publications can be found here.
We look forward to an engaging first round of posts.
Thursday, August 15, 2013
This symposium marks the publication of Revisiting the Contracts Scholarship of Stewart Macaulay: On the Empirical and the Lyrical (Hart Publishing 2013), a volume edited by Jean Braucher, John Kidwell, and William C. Whitford. Starting next week and continuing for several weeks, this blog will publish entries both by contributors to the book and by others who have engaged with Macaulay’s work in the field of contracts.
Fifty years ago, the American Sociological Review published Macaulay’s Non-Contractual Relations in Business—A Preliminary Study, an empirical examination of the use and, more strikingly, the non-use of contracts in business. One of the 20 most cited articles in the history of ASR, its influence has grown with each passing decade. Macaulay (pictured) has produced an impressive number of other significant articles in contract law, as well as influential work in law and social science, and is the lead author of the casebook, Contracts: Law in Action, Vol. I and II (LexisNexis 3rd Ed. 2010/2011), co-authored by Braucher, Kidwell, and Whitford (introduction available here).
“Bill Whitford, the late John Kidwell, and I wanted to celebrate Macaulay’s contributions to contracts scholarship, particularly his use of law in action and relational perspectives,” explains Jean Braucher, Roger C. Henderson Professor of Law at the University of Arizona. “We were extremely pleased that leading and rising scholars contributed 15 original chapters to the book, everything from theoretical essays to new empirical work to relational critiques of legal doctrine.” Braucher adds that Kidwell, who died in 2012, participated fully in the development of the book and edited several of the chapters.
Kidwell, Whitford, and Macaulay all served for many years on the faculty at the Wisconsin Law School, where the law in action approach is a tradition. Whitford and Macaulay are both emeritus professors there. Macaulay, who joined the Wisconsin law faculty in 1957, has held two named professorships there, serving as the Malcolm Pitman Sharp Professor and Theodore W. Brazeau Professor of Law.
Revisiting the Contracts Scholarship of Stewart Macaulay begins with Non-Contractual Relations in Business, reproduced in full, and then provides extended excerpts from two other significant articles by Macaulay, Private Legislation and the Duty to Read—Business Run by IBM Machine, the Law of Contracts and Credit Cards (1966) and The Real Deal and the Paper Deal: Empirical Pictures of Relationships, Complexity and the Urge for Transparent Simple Rules (2003). The book also includes 15 chapters written by other scholars, Brian H. Bix, David Campbell, Jay M. Feinman, Robert W. Gordon, Claire A. Hill, Charles L. Knapp, Ethan J. Lieb, Li-Wen Lin, Deborah Waire Post, Edward Rubin, Carol Sanger, Robert E. Scott, D. Gordon Smith, Josh Whitford, John Wightman, and William J. Woodward, Jr. The book’s table of contents and preface are available here (giving the title and author of each chapter, briefly describing each chapter, and providing an overview of Macaulay’s career and contributions to contracts teaching).
Monday, July 22, 2013
Hart Publishing has asked us to share the following book announcement with our readers:
Rethinking Enrichment by Transfer
By Helen Scott
Conventional thinking teaches that the absence of liability-in particular contractual invalidity - is itself the reason for the restitution of transfers in the South African law of unjustified enrichment. However, this book argues that while the absence of a relationship of indebtedness is a necessary condition for restitution in such cases, it is not a sufficient condition. The book takes as its focus those instances in which the invalidity thesis is strongest, namely, those traditionally classified as instances of the condictio indebiti, the claim to recover undue transfers. It seeks to demonstrate that in all such instances it is necessary for the plaintiff to show not only the absence of his liability to transfer but also a specific reason for restitution, such as mistake, compulsion or incapacity. Furthermore, this book explores the reasons for the rise of unjust factors in South African law, attributing this development in part to the influence of the Roman-Dutch restitutio in integrum, an extraordinary, equitable remedy that has historically operated independently of the established enrichment remedies of the civilian tradition, and which even now remains imperfectly integrated into the substantive law of enrichment. Finally, the book seeks to defend in principled terms the mixed approach to enrichment by transfer (an approach based both on unjust factors and on the absence of a legal ground) which appears to characterise modern South African law. It advocates the rationalisation of the causes of action comprised within the condictio indebiti, many of which are subject to additional historically-determined requirements, in light of this mixed analysis.
Helen Scott is an Associate Professor in the Department of Private Law at the University of Cape Town.
July 2013 250pp Hbk 9781849462235
RSP: £55 / €71.50 / US$110
20% DISCOUNT PRICE: £44 / €57.20 / US $88
Order Online in the US
If you would like to place an order you can do so through the Hart Publishing website (link below). To receive the discount please mention ref:‘CONTRACTSPROFBLOG’ in the special instructions field. Please note that the discount will not be shown on your order but will be applied when your order is processed.
Order Online in the UK, EU and Rest of World
If you would like to place an order you can do so through the Hart Publishing website (link below). To receive the discount please type the reference‘CONTRACTSPROFBLOG’ in the voucher code field and click ‘apply’.
UK, EU and ROW website: http://www.hartpub.co.uk/BookDetails.aspx?ISBN=9781849462235
If you have any questions please contact Hart Publishing
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Thursday, July 11, 2013
There may be some irony in this situation, or perhaps it is strategic: the website performs, and makes one of Nancy's points for her. Wrap contracts are everywhere and have become an unavoidable fact of life for the computer literate.
Wednesday, June 12, 2013
For those of you who cannot get enough input on Margaret Jane Radin's Boilerplate: The Fine Print, Vanishing Rights and the Rule of Law, we have yet another review. This one is from friend of the blog Steven Feldman. Links to other contributions from our online symposium on the book can be found here.
In her book, Boilerplate: The Fine Print, Vanishing Rights, and The Rule of Law, Professor Margaret Jane Radin suggests the expansion of tort law as the centerpiece remedy for what she terms abusive mass market contract boilerplate. (Radin, p. 216). As a complement to existing contract remedies, she posits a new tort, i.e., “intentional deprivation of basic legal rights.” (Radin, pp. 198, 211, 216). According to Radin, this intentional tort would cover abusive boilerplate, i.e., “a firm that imposed severe remedy deletions of rights that are at least partially market-inalienable, under circumstances of non-consent and mass market distribution . . . .” (Radin, p. 211).This intentional tort would be a companion to another new tort reconceptualizing abusive boilerplate as a defective “product” under the law of product liability. (Radin, pp. 198, 222-23).
Radin’s proposal to use the tort law system to remedy boilerplate abuse has attracted support from respected academic commentators. Professor Omri Ben-Shahar in his review of the book calls Radin’s suggestion a “welcome new framework” and “an immensely creative idea, surely to become a legacy of the book, and it deserves careful attention . . . .” Omri Ben-Shahar, Regulation Through Boilerplate: An Apologia, ___ Mich. L. Rev. ___ (2013) (forthcoming) (available at the SSRN Electronic Library). Because I believe that Radin’s suggested tort remedies contradict numerous legal principles, my critique will explain why the chances are minimal that any U.S jurisdiction would accept her proposals to make a tort out of a contract dispute.
Radin: Precedent exists for the creation of new torts by common law courts, such as the torts involving invasion of privacy. (Radin, p. 198).
Response: Radin is correct that the torts involving invasion of privacy were judicially created. What Radin omits is that although some courts claim the common law authority to create new torts, they characteristically “tread cautiously” in this area, Rees v. Smith, 301 S.W.3d 467, 471 (Ark. 2009), as they balance numerous legal and substantive considerations, Burns v. Neiman Marcus Group, Inc., 93 Cal. Rptr. 3d 130, 136 (Cal. Dist. App. 2009)(listing considerations). Thus, for example, courts considering a new tort must balance the need to meet society's changing needs against the prospect of boundless claims in an already crowded judicial system. Rees, 301 S.W.3d at 471. In another policy, courts “[w]ill decline to recognize a new cause of action if there are sufficient other avenues, short of creating a new cause of action, that serve to remedy the situation for a plaintiff.” Id.
Radin fails to point out that the usual outcome is “countless refusals” by judges to create new torts. Anita Bernstein, How To Make A New Tort: Three Paradoxes, 75 Tex. L. Rev. 1539, 1546 n.38 (1997)(citing decisions). Indeed, some courts decline altogether to create new actions in tort. Their rationale is that legislatures have better institutional capability to balance the competing public policy considerations attendant with new forms of liability. Murphy v. American Home Products Corp., 448 N.E.2d 86, 89-90 (N.Y. 1983); Accent Store Design, Inc. v. Marathon House, Inc., 674 A.2d 1223, 1226 (R.I. 1996)(“We have long held … that the creation of new causes of action is a legislative function.”). Radin does not mention this split of authority and does not make a convincing case that existing contract remedies, such as contract invalidation based on unconscionability, are inadequate to address meritorious consumer claims.
Estimates are that ninety-nine percent of all contracts are standard form adhesion contracts. Wayne R. Barnes, Toward A Fairer Model of Consumer Consent To Standard Form Contracts: In Defense Of Restatement Section 211(3), 82 Wash. L. Rev. 227, 233 (2007). Because Radin’s new torts would conceivably cover a high percentage of these standardized mass distribution contracts nationwide, courts should think twice before hampering the use of a business tool that “[i]s essential to the functioning of the economy.” See 1-1 Corbin on Contracts § 1.4. (Rev. ed. 1993). A real possibility also exists that Radin’s proposals would incite boundless claims in an already crowded judicial system. Thus, it is highly unlikely that any court would approve Radin’s proposals for expansive new tort liability. Also improbable is whether any state legislature--with many dominated by conservative representatives--would expand consumer rights beyond existing consumer protection statutes.
Tuesday, June 11, 2013
Irma S. Russell is Dean and Professor of Law at the University of Montana School of Law.
Kenneth Adams’ recently released third edition of A Manual of Style for Contract Drafting, is a hefty volume. When I opened the package containing this manual my first thought was: “Wow, this is bigger than expected. It looks really time consuming.” At 455 pages, the book is closer to Fowler’s than Strunk & White. It is worth the time to read it. In fact, once you start reading, it is hard to put down. The writing is clear and concise, the tone is engaging, and the range of usage addressed is impressive.
This book provides far more than drafting tips. This author
has considered language in a deep way and gives thoughtful and sometimes
provocative assessments of the usages he endorses. His discussion of the
language of belief, the language of intention, the language of recommendation
and the distinctions among the categories is notable for its logic and even
philosophical assessment as well as for its authority of declaring a particular
usage superior to other constructions.
(Be sure to look for his treatment of "between" and
"among" in reference to multiple parties. This discussion may also apply to my last
sentence before this parenthetical.)
The manual is useful for all lawyers who draft agreements, and most do of course. Indeed few lawyers can separate themselves from contract drafting or the need for precise language. A plea arrangement in the criminal context is as subject to the risk of ambiguity as a lease agreement. A tort settlement is in as great a need of careful word choice as a corporate merger. The trap for the casual drafter can involve malpractice claims as well as disappointed expectations of clients.
The author’s introduction makes clear the work’s goal of providing precise and
consistent language in contracts. He endorses consistency “because
differences in wording can result in unintended differences in meaning.”
He notes the necessity of a manual of style “because traditional contract
language needs a thorough overhaul.”
This point underscores the need for the point-by-point treatment
provided in the book.
The goals the author sets for this work are indeed as worthwhile (and as hard to achieve) in today’s world as in Fowler’s. Creating documents with few opportunities for confusion means that the careful drafter will not need to see his words in court and the client will not need to roll the dice of litigation in arguing for his belief or assumptions about the intentions of the parties.
The book delivers on its promise to serve to help its user find "greater clarity and consistency in written usages." Though modest in its succinct statement, this is an ambitious promise, and one that the book fulfills. The principle of Occam's razor is at work here despite the heft of the volume. Each discussion of a phrase or word is brief and to the point. The length of the book results from the number and scope of the issues addressed rather than from any drawn out discussions. More elegant contract language is the result of the guidance offered here. While Strunk & White is certainly shorter, it does not take on the range of issues Adams reaches, and I am convinced both revered authors would approve of this manual of style.
Opening this book was a Pandora-type move for me, and now I am hooked on the author’s blog: Adams on Drafting. You can access it here but I warn you now: You can’t read just one. The risk for the reader opening either the book or the blog is getting caught up in the fascinating world of contract drafting. Even after you find the answer to the specific question that sent you to the book, you may be unable to stop reading. I’m heading back to the blog now to look for more on “between” and “among.”
[Posted, on Irma Russell's behalf, by JT]
Monday, June 10, 2013
Kenneth Adams’ third edition to the Manual of Style for Contract Drafting (“Contract Drafting”) delivers invaluable advice to any attorney or professional who drafts contracts or contract terms. The book is also highly suitable for law school classroom use in drafting classes, business school, or undergraduate business courses. This book has found a permanent place on my shelf among my go-to style manuals.
Contract Drafting is a style manual that goes well beyond explicating basic contract conventions, admonishing attorneys to use “plain English” and avoid “legalese,” and providing lists of awkward or ambiguous words and phrases to excise from the drafting lexicon. Adams does all of these things effectively and efficiently, but Contract Drafting delivers on many more levels.
Like previous editions, this book will be useful across a wide range of applications. As Adams notes in the introduction:
This manual should be of use to readers in every contract ecosystem—a solo or small-firm general practitioner handling a broad range of contracts . . ., a contract-management professional responsible for negotiating contracts with customers; a big-law associate drafting mergers-and-acquisitions contracts; an in-house lawyer overhauling the company’s template sales contract; a paralegal reviewing confidentiality agreements a company is asked to sign; a judge trying to make sense of a confusing contract provision.
In this list, Adams omits another important audience – law students. Contract Drafting is a nearly ideal tool for teaching a contract drafting course. As discussed below, the content of the manual goes beyond listing blackletter principles and providing tables of words and phrases to avoid. In this most recent edition of Contract Drafting, Adams carefully walks the reader through detailed explanations of his drafting principles while at the same time presenting an extraordinarily complete manual that teaches the inexperienced and informs the senior practitioner. Any professional – lawyer or non-lawyer – or law student who deals with contracts in any manner should keep this book near at hand.