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]
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.
Tuesday, August 27, 2013
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]
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).
Friday, August 9, 2013
This year, my colleauges at the Valparaiso University Law School and I, with the help of our librarian, Jeese Bowman (pictured), are teaching with the aid of this LibGuide. The LibGuide contains all of the cases that we will use in our courses, plus links to Restatement, UCC and CISG sections, as well as tabs through which students can find links to excercises, past exams and model answers, study guides, blog posts and other information that might prove useful to our students.
The move to the LibGuide was motivated by a number of considerations. First, we have all used different casebooks and find a great deal to praise and admire in all of them. However, no single casebook can be perfect for each contracts professor's individual needs. I have a roster of cases that I think work best for the material I want to convey to my students. No single casebook includes all of the cases I want to use, and the casebook authors sometimes edit their cases slightly differently than how I would edit them. My colleagues and I edited the cases posted on the LibGuide to suit our teaching needs, and if we differ, we can always put up multiple versions.
Second, even if I could find the perfect casebook that had every single case I want to teach and all the relevant ancillary materials, I still could not justify the expense to my students. Casebook prices are simply too high, since we can deliver the same materials through the LibGuides. I should note that, because I ban laptops and other technology from my classroom, I do require that the students buy xeroxed copies of the edited cases. That will run them $10 a piece for the first seven-week minimester.
Yup! That's not a typo! We are teaching contracts in two, two-credit, seven-week "minimesters," a topic about which I will have a lot to say in future posts.
The LibGuide is still a work in progress. Each week, I send Jesse more materials to add to the LibGuide. This is another advantage of the LibGuide over print course materials. It is easily expanded; easily revised; easily updated.
The final advantage of the LibGuide is (dare I say it?) . . . LibGuides are fun. Ask any librarian! And believe you me, librarians know how to have fun. They are fun for the same reason that this blog is fun. You can follow links that interest you, and they often take you to unexpected and illuminating places. We hope that our LibGuide will grow and prosper and that it will provide a portal through which our students can wander cautiously, tentatively until [whoosh!] they fall down a rabbit hole and emerge in the Wonderland of contract law.
Sunday, August 4, 2013
Monday, June 24, 2013
Jeremy was nice enough to ask me to write quick post reacting to American Express Co. v. Italian Colors Restaurants. Because he’s already provided a good summary of the decision, I’m just going to launch in.
1. The road not taken. After oral argument, I expected Amex to be a 6-2 reversal, with Justice Breyer joining the majority. I thought the rough gist of the decision was going to be something like this: “The plaintiffs argue that they can’t vindicate their antitrust rights without the class action device because the cost of an expert report dwarfs any individual plaintiff’s potential recovery. But arbitration isn’t subject to the same evidentiary demands as litigation. Indeed, it’s flexible and casual. Perhaps each plaintiff can prove up its case without a full-fledged expert report. Let’s compel bilateral arbitration and see what happens!” For instance, Justice Breyer repeatedly referred to the prospect of the parties “getting it done cheap” in the extrajudicial forum. Justice Kennedy also emphasized that arbitration doesn’t “involve the costs and formalities of litigation.” (This actually prompted Paul Clement to respond, “God bless it, Justice Kennedy”—check out page 35 of the hearing transcript—which I can only imagine the savvy litigator said with his hand o’er his heart). But perhaps the anything-goes-in-arbitration approach seemed too dangerous to the majority. After all, it raised the specter of anything going in arbitration—including antitrust plaintiffs vindicating their rights.
2. Does the vindication of rights doctrine survive exist? Like AT&T Mobility LLC v. Concepcion, Amex’s long-term impact is hard to discern through the fog of results-oriented reasoning. In Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc. and Green Tree Financial Corp.-Ala. v. Randolph, the Court suggested—but did not squarely hold—that judges can invalidate arbitration clauses when plaintiffs prove that they can’t effectively vindicate their federal statutory rights in arbitration. The primary way plaintiffs met this burden was by offering evidence of prohibitive costs: for instance, hefty filing or arbitrator’s fees. However, in Amex, Justice Scalia calls the rule “dicta” and opines that “Mitsubishi Motors did not hold that federal statutory claims are subject to arbitration so long as the claimant may effectively vindicate his rights in the arbitral forum.” According to Justice Scalia, if there is such a thing as the vindication of rights doctrine, it’s not about vindication of rights; instead, it hinges on the narrower inquiry of whether an arbitration clause is the functional equivalent of “a prospective waiver of a party’s right to pursue statutory remedies.” That is, this mythical but perhaps not mythical rule only applies when a contract literally bars plaintiffs from even asserting a federal statutory claim and “would perhaps cover filing and administrative fees attached to arbitration that are so high as to make access to the forum impracticable.” But it doesn’t include the mere “expense involved in proving a statutory remedy.” That’s a lot of attention lavished upon a doctrine that might not even be real!
3. Distinguishing Amex. I don’t know how much good this does, but I read Amex not to govern all arbitration clauses. Although there seems to be some confusion about the specific provision in Amex, my understanding was that it didn’t just preclude class actions—it also barred plaintiffs from sharing information, consolidating claims, or recovering costs if they won. In perhaps the most bizarre part of the majority opinion, footnote 4 (1) insists that the Amex clause doesn’t contain these features and then (2) limits its holding to identical provisions. Arguably, this leaves a window open for future plaintiffs subject to strict arbitration clauses to show that they can’t engage in “other forms of cost sharing” and thus need the class action device to vindicate their federal statutory rights.
4. My new favorite Justice. Something that has always bugged me about Concepcion is the blandness of Justice Breyer’s dissent. So I was heartened by Justice Kagan’s sarcastic, point-by-point smackdown of the majority. I know I’m biased, but I found it to be pretty devastating, and I’d be psyched if she became the go-to Justice on the left for arbitration issues.[Posted, on David Horton's behalf, by JT]
Friday, June 14, 2013
I just finished reading contracts prof Amy J. Schmitz's article, Sex Matters: Considering Gender in Consumer Contracting, 19 CARDOZO J. LAW & GENDER 437 (2013) which I thought was particularly timely given all the interest in consumer contracts. As Schmitz points out, too often discussions about "context" are left out of discussions about consumer contracts, especially from efficiency theorists who "mistakenly assume that market competition and antidiscrimination legislation address any improper biases in contracting." Schmitz's article is a thoughtful and comprehensive work that canvasses and synthesizes existing research, including behavioral economics and consumer legislation, in this area. She does a great job of highlighting ways in which existing legislation falls short of protecting against gender discrimination and incorporates a great deal of empirical and cognitive research regarding how gender affects both parties in consumer contracting scenarios. She notes that the available data suggests that women receive "less financially attractive sales and loan contracts, which may lead to higher debt loads for women." (at 447) Schmitz also conducted her own survey and shares the results which indicated gender disparities in areas such as confidence in ability to negotiate terms and ability to get companies to change terms. She argues in this article (as she has elsewhere) that context and "contracting culture" matters, and argues that gender be considered among the factors contributing to a contracting culture. For those who think that the free market is a fair market, Schmitz's paper should provide food for thought (as should this article that discrimination in housing persists against non-whites).
*Yes, I knew that putting "sex" in the title would increase traffic.
Thursday, June 13, 2013
The United States Supreme Court rarely has occasion to opine on contract law, the contours of which are largely left to state courts. However, a couple of recent arbitration cases provided the court with a unique opportunity to point out the difference between contract terms implied-in-fact and contract terms implied-in-law. As any diligent first-year Contracts student should know, the former must rest upon the actual consent of the parties (even though not clearly expressed), while the latter are given effect through default legal rules, applied, as necessary, where the parties’ agreement is silent. This distinction between the two (and between contract “interpretation” and “construction”) is, of course, not always made clear in contract cases addressing one or both. However, these two recent opinions, Stolt-Nielsen v. Animal Feeds Int’l Corp., 130 S.Ct. 1758 (2010), and Oxford Health Plans, LLC v. Sutter, 2013 WL 2459522 (U.S.) (June 10, 2013) illustrate the difference quite nicely—whatever one may think about the content of the Court’s arbitration jurisprudence animating these decisions.
In Stolt-Nielsen, a panel of arbitrators had reasoned that an agreement permitted class arbitration, because it did not preclude it. Stolt-Nielsen at 1766. In effect, the parties’ silence required the arbitrators to supply an omitted essential term—a default rule—and they did so, thereby construing the agreement as allowing for class arbitration. Id. at 1768-69 and 1781. While acknowledging the power of arbitrators to craft procedural rules, generally, the Court explained that a “default rule,” allowing for class arbitration was sufficiently inconsistent with the fundamental nature of arbitration as to be beyond the power of arbitrators. Id. at 1668-69, 1775-76 (referencing the Restatement (Second) of Contracts § 204 on default rules and relying on FAA § 10(a)(4) to hold that the arbitrators had exceeded their powers). After Stolt-Nielsen, some might have expected that class arbitration would require some sort of “clear and unmistakable” expression of party intent (as the Court purports to require for a “delegation” clause, assigning jurisdictional decisions to the arbitrator). This is not necessarily so, however, as we learned this week in Oxford Health Plans.
In Oxford Health Plans, a claimant sought to bring class arbitration claims, and respondent asserted they were not allowed under the arbitration agreement. Both parties agreed to submit the question to a sole arbitrator, who “interpreted” the parties’ agreement and determined that it impliedly allowed class arbitration. Id. In affirming the arbitrator’s decision, Justice Kagan explained that the arbitrator was merely interpreting the actual intent-in-fact of the parties—a task clearly assigned to the arbitrator by those same parties. Id. Therefore, the arbitrator’s decision was fully within his power, even if erroneous—in fact, even if “grievously erroneous.” Id.
Thus, the Court neatly distinguished between the power of an arbitrator to determine actual, factual party intent, when assigned that task by the parties, and the power of the arbitrator to craft legal default rules (at least beyond the scope of general arbitration procedures). This distinction is of course analogous to the distinction between contract interpretation—generally an issue for the jury, if in question—and contract construction—generally an issue for the court.
Perhaps of greater interest to those who follow the Court’s arbitration jurisprudence, Oxford Health Plans appears to continue the inexorable march towards a seemingly unreviewable form of contractual Kompetenz-Kompetenz, see Jack Graves & Yelena Davydan, Competence-Competence and Separability: American Style in, International Arbitration And International Commercial Law: Synergy, Convergence and Evolution (Kluwer 2011) (Part 2) and Jack Graves, Arbitration as Contract: The Need for a Fully Developed and Comprehensive Set of Statutory Default Legal Rules, 2 William & Mary Bus. L. Rev. 225, 276-85 (2011), initially announced in First Options, Inc. v. Kaplan, 115 S.Ct. 1920 (1995), further expounded upon in Rent-A-Center, West, Inc. v. Jackson, 130 S.C t. 2772 (2010), and made even more seemingly absolute in Oxford Health Care. The Court had already made abundantly clear that a decision as to whether the parties had in fact agreed to arbitrate a dispute—when the decision was “delegated” to an arbitrator—was beyond court review, except as provided under FAA § 10(a). In Oxford Health Care, the Court further clarified the extraordinarily narrow scope of FAA § 10(a)(4).
[posted by Meredith R. Miller on behalf of Jack Graves]
Friday, May 24, 2013
Given all the excitement over boilerplate on this blog, I thought it would be a good time to remind readers of problems that might arise that don't exactly involve (just) boilerplate, It's not just the words in the contract -- the way the contract is presented can create problems, too. I've been meaning for a while to discuss this NYT article about a lawsuit against Dollar Rent a Car. According to the article and the complaint, the plaintiffs were customers who specifically declined the insurance coverage that car rental companies are always pushing (and which is often covered by customers’ personal auto insurance policy and/or credit card). They were then handed a tablet and asked to sign electronically. When they returned the car, they were surprised with a much larger-than-expected bill that included a “loss damage waiver” which, like insurance, “waives” the customer’s liability for loss or damage to the car.
I planned to blog about this last month, but just as I was about to, I received a reprint of Russell Korobkin’s article, recently published in the California Law Review. The title, The Borat Problem in Negotiation: Fraud, Assent and the Behavioral Law and Economics of Standard Form Contracts, sounded intriguing and as I started to read it, I realized that the article addressed a lot of the issues raised by the car rental form contract/electronic signature situation. I thought it might be fun (er, contracts prof style-fun) to view the Dollar Rent a Car problem through the lens of Korobkin’s proposed Borat solution.
According to the article, the Dollar-Rent-A-Car plaintiffs explicitly told the car rental agent that they were declining insurance coverage yet unknowingly signed for it on an electronic tablet. This illustrates one way that contracting form matters –I suspect it was easier for customers to be misled by the “loss damage waiver” language because they didn’t have an easy way to read the surrounding language. While paper consumer contracts are generally adhesive, customers do have the option of declining insurance coverage. While many customers may still have overlooked the meaning of the language, others may have scanned the few sentences immediately before the signature line (this seems particularly true of the plaintiffs, who one of whom is an insurance lawyer).
Sales agents are typically paid a commission to upsell the insurance coverage and each of the plaintiffs paid a hundred to several hundred dollars more than they expected to pay.
I tried to get a copy of Dollar’s rental agreement off their website. While their general policies are posted, which references their rental agreement, the agreement itself is not available. That’s already a strike against them in my book – why not post the rental agreement on your website since you’re going to have your customer sign it anyway? I think it’s because the company doesn’t really expect anyone to read the agreement. Most people don’t read, but that doesn’t mean they wouldn’t if the company made more of an effort to make the agreement accessible and readable.
Without a copy of Dollar’s actual rental agreement, I can only make assumptions about what it contains but my guess is that it contains an integration clause and a no-oral modification or “NOM” clause. The latter may not be enforced but the former brings the contract into the grip of the parol evidence rule. The PER rule won’t effectively block a fraud claim, but fraud claims may be difficult to prove in this context. The other avenue for redress is under a consumer protection statute claiming unfair or deceptive trade practices. But what about contract law – can it do anything here to help the consumers?
Korobkin’s article doesn’t specifically address consumer actions, but he tackles the “Borat Problem” which often occurs in consumer contracting situations. According to Korobkin, the Borat Problem occurs when two parties “reach an oral agreement. The first then presents a standard form contract, which the second signs without reading or without reading carefully. When the second party later objects that the first did not perform according to the oral representations, the first party points out that the signed document includes different terms or disclaims prior representations and promises.”
As readers of this blog are well aware, contractsprofs went through a slight obsessive period with the Borat contract when it first arose. To quickly summarize, several people who were in the 2006 movie, Borat: Cultural Learnings of America for Make Benefit Glorious Nation of Kazakhstan sued the producer, Twentieth Century Fox, claiming that they were misled into appearing in it. Korobkin states that these plaintiffs claimed that the studio obtained their consent using a two part strategy, “false representations followed by standard form contracts that included language designed to contradict or disclaim those representations.”
Sound similar to the Dollar situation? Although the Dollar agent didn’t expressly make false representations, they allegedly acted in a way that misled the plaintiffs into believing they were acting consistent with their wishes, and that the contract they were signing reflected their understanding. Korobkin discusses existing legal remedies to the Borat problem and concludes they are not so satisfying for various reasons. He then discusses the risk of “bilateral opportunism,” meaning that a “pure duty to read” rule leaves nondrafting parties vulnerable to exploitation by drafters and a “no-exploitation rule” leaves drafters vulnerable to opportunistic behavior (i.e. bad faith claims) by nondrafters. He discusses the different ways that each party might take advantage of the other under either rule and throws in a good amount of behavioral economics to back up his arguments – for example, “confirmation bias” makes it difficult for even sophisticated nondrafters to notice when a contract term contradicts a prior representation made by the drafter. Korobkin also discusses the role of trust, specifically that reading a contract may signal that the nondrafter doesn’t trust the drafter. I think trust plays a role (even if small) in the Dollar scenario – afterall, nobody wants to be that jerk in line who challenges the smiling service rep. There's also social pressure in that nobody want to be that jerk holding up the line of foot tapping customers by asking questions about fine print (believe me, I know).
Korobkin’s “Borat Solution” would require specific assent to written terms that are inconsistent with prior representations. This effectively puts the burden on drafters to include a “clear statement” that the particular provision takes precedence over prior representations and “realistic notice” which would generally mean that the parties actively negotiated the term. I like this proposal (and have proposed something very similar to it in the context of online agreements) because it recognizes that drafters have the power to make terms more salient. The notion of blanket assent puts too much of a burden on the nondrafting party instead of the party that has the power to actually communicate the terms more effectively.
So would the Borat solution have changed anything in the Dollar scenario? I think so, but for a different reason than the actual Borat scenario. A clear statement and realistic notice would preclude having customers sign on an electronic tablet without also making immediately visible the relevant provision. In other words, the customer wouldn't be asked to sign without being able to read the waiver provision. Although it's not expressly stated, it seems implied from the NYT article that the contract provision was not viewable on the tablet. If that's the case, that provision would not be enforceable.
So, for those of you planning to research the consumer contracts conundrum this summer, in addition to Margaret Jane Radin’s book, Boilerplate: The Fine Print, Vanishing Rights, and the Rule of Law and Oren Bar-Gill’s book, Seduction by Contract, I recommend that you add Korobkin’s article to your summer reading list.
Monday, May 13, 2013
This is the first in a series of posts reviewing Margaret Jane Radin's Boilerplate: The Fine Print, Vanishing Rights and the Rule of Law.
In this fine book, Margaret Jane Radin concludes that “consent” lacks a reality referent in contract. That is, somewhere between what she describes as “World A (Agreement),” the universe of enforceable promises negotiated “at arms’ length” by parties of similar relative sophistication, and “World B (Boilerplate),” where standard and oppressive terms effect normative and democratic degradation, consent is lost. This conclusion is not shocking; it is difficult to think of anyone (probably including even Randy Barnett) who honestly believes that real consent has very much to do with most (even virtually all) contracting these days. So we can all agree: where there is boilerplate, there is no “meaningful” consent, which is to say there is none of the consent that should matter to contract. From that premise, Professor Radin concludes that World B is not a contracts universe at all, but is instead a realm better understood by reference to tort principles (and it is even worse than Grant Gilmore ever imagined).
But once we acknowledge the death of consent, how much more new is there to say about boilerplate? You could despair with Professor Radin that political forces make it unlikely that the American justice system will respond as would the European Union; that consequentialist apologists rely on arm chair empirical assumptions without actually doing the necessary math; that by a 5-4 decision of the United States Supreme Court the Federal Arbitration Act has been contorted to undermine our justice system; that a curiously reasoned decision of the United States Court of Appeals for the Seventh Circuit has somehow become the prevailing (if not final) word on contract formation: but at the end of the day, it is difficult to identify certainly the extent of the harm or glimpse a viable cure. (Those troubled by boilerplate need to do the same math they complain form contracts proponents fail to do.)
While Professor Radin is right that there are distinguishable Worlds of contract, she does not make clear enough that the two Worlds are on a continuum; they are not so clearly dichotomous. Further, the contours of the continuum are obscure: many very sophisticated people know quite well what they are giving up when they sign a form contract or click “I agree," and yet do so willingly. That is generally the rational thing to do. Now Boilerplate does put boilerplate on a three dimensional matrix that would be sensitive to degrees of consent, alienability of the right in issue, and the size of the cohort prejudiced. But in describing Worlds A and B in dichotomous terms, the book may obscure the reasons why it remains rational to agree to form contracts, without reading their terms. So I think the book would have been stronger had it described Worlds A and B along a fourth dimension.
What Professor Radin has to say about consent is surely true, but what she says is really a truism: we know that consent is a conclusion rather than an analytical device, and that consent is also a term of art, largely divorced from the important normative work it can do in World A. What we do not know, though, is when World A becomes World B: it is not just the case that all form contracts are World B contracts. Whether a contract is World A or World B is a function of the very factors that contract doctrine could take seriously, if the composition of the Supreme Court were different, and if all Federal Courts of Appeal judges knew a bit more about the common law of contract and the UCC.[Posted, on Peter Alces's behalf, by JT]
We begin our online symposium on Margaret Jane Radin's book, Boilerplate: The Fine Print, Vanishing Rights and the Rule of Law with five posts this week. This post will serve to introduce our guest bloggers.
Peter A. Alces is the Rollins Professor of Law and Cabell Research Professor of Law at the College of William & Mary School of Law, where he has taught since 1991. He is the author of A Theory of Contract Law: Empirical Insights and Moral Psychology; Commercial Contracting; The Law of Suretyship and Guaranty; Bankruptcy: Cases and Materials; Cases, Problems and Materials on Payment Systems; The Commercial Law of Intellectual Property; Sales, Leases and Bulk Transfers; The Law of Fraudulent Transactions; and Uniform Commercial Code Transactions Guide. He has also published articles in the Northwestern, Michigan, Minnesota, Illinois, North Carolina, Fordham, California, Texas, and William and Mary Law Reviews, and the Emory, Ohio State and Georgetown Law Journals.
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.”
Andrew Gold is a professor of law at the Depaul University College of law. His primary research interests address legal theory and the law of corporations. Following graduation from Duke University School of Law, he clerked with the Honorable Daniel Manion of the Seventh Circuit, and with the Honorable Loren Smith of the Court of Federal Claims. After his clerkships, he joined Skadden, Arps, Slate, Meagher & Flom, where he practiced corporate litigation. Professor Gold's article, "A Property Theory of Contract," was lead article in the 2009 volume of the Northwestern University Law Review. His recent publications also include articles in the William and Mary, U.C. Davis, and Maryland law reviews. In 2007, Professor Gold received the College of Law's Award for Excellence in Scholarship, and, in 2010, he received the Award for Excellence in Teaching. During the 2011-2012 academic year, Professor Gold was a Visiting Scholar at Harvard Law School, and in Fall 2011, he was an HLA Hart Visiting Fellow at the University of Oxford. His scholarship has focused on contract theory; private law theory; fiduciary duties in corporate law; and Section 10(b) of the Securities Exchange Act.
David Horton joined the UC Davis faculty in 2012, after three years at Loyola Law School, Los Angeles. He received his B.A. cum laude from Carleton College in 1997 and his J.D. from UCLA School of Law in 2004. At UCLA, he was elected to the Order of the Coif and served as Chief Articles Editor of the UCLA Law Review. He then practiced at Morrison & Foerster in San Francisco and clerked for the Honorable Ronald M. Whyte of the United States District Court for the Northern District of California. From 2007 to 2009, he taught legal research and writing at UC Berkeley School of Law. Horton’s research focuses on wills and trusts, federal arbitration law, and contracts. His recent work has appeared or will soon appear in the NYU Law Review, Northwestern University Law Review, Georgetown Law Journal, UCLA Law Review, Notre Dame Law Review, North Carolina Law Review, University of Colorado Law Review, and Virginia Law Review in Brief, among others. He also wrote an amicus brief on behalf of contracts professors in AT&T Mobility LLC v. Concepcion, the recent Supreme Court case.
Ethan J. Leib is a noted expert in constitutional law, legislation, and contracts. His most recent book, Friend v. Friend: Friendships and What, If Anything, the Law Should Do About Them (2011), explores the benefits of legal recognition of friendship and was published by Oxford University Press. He has three forthcoming articles on public law subjects: one in the Journal of Political Philosophy examining fiduciary principles in political representation; one in the California Law Review applying the fiduciary principle to the activity of judging within democracies; and one in The University of Chicago Law Review exploring whether elected judges should be interpreting statutes differently from their appointed colleagues. Leib's other academic writing has appeared in journals such as the Yale Law Journal, Northwestern University Law Review, UCLA Law Review, Constitutional Commentary, Election Law Journal, Journal of Legal Education, Law & Philosophy, and elsewhere. He has also written for a broader audience in the New York Times, USA Today, SF Chronicle, Policy Review,Washington Post, New York Law Journal, The American Scholar, and The New Republic. Before joining Fordham, Leib was a Professor of Law at the University of California–Hastings. He has served as a Law Clerk to Chief Judge John M. Walker, Jr., of the U.S. Court of Appeals for the Second Circuit and as an Associate at Debevoise & Plimpton LLP in New York.
We look forward to a stimulating fortnight of exchanges on this important new book.
Monday, March 4, 2013
We posted earlier in the semester about the baffling case Columbia Nitrogen v. Royster. Victor Golberg (pictured) wrote to us to recommend his book chapter on the subject in his Framing Contract Law (2007). Professor Goldberg names Columbia Nitrogen, together with Nanakuli Paving as a "Terrible Twosome," that should render law professors apoplectic. That is so because when courts use course of dealing or custom to set aside fied price terms, contracting parties can have "little confidence in their ability to predict the outcomes if their disputes do end up in litigation" (p. 162).
John Murray, writing in 1986, praised the decision for evidencing "a sophisticated judicial understanding of the major modifications in contract law" and for its "sophistication with respect to [UCC §] 2-207." But Professor Goldberg sees a darker story, in which CNC's counsel attempted to undo, by whatever means necessary, what had turned out to be a bad bargain." As a result, says Professor Goldberg, the court "converted a straightforward agreement into an incoherent mess" (p. 187).
Happily, according to Professor Goldberg, Columbia Nitrogen is not followed. Contractual relationships are governed by two complementary systems: legal enforcement, which has strict rules, and social enforcment, which is governed by informal norms. The mistake of the court and the "potential cost of Columbia Nitrogen" is to infer legal rules from social rules in a way that allows legal rules to hamstring informal social norms (p. 188).
It is a nice piece of wisdom to pull out of a troublesome opinion. The full details of the case, going well beyond what is available in the published opinion, can be found in PRofessor Goldberg's book.
Monday, December 3, 2012