Monday, September 21, 2020
CONTRACTING COVID: PRIVATE ORDER AND PUBLIC GOOD
JONATHAN C. LIPSON*
Part I: Health Safety
Responses to the novel coronavirus (COVID) have been framed largely in terms of public institutions: What can governments do to create and enforce health-safety standards, resolve or prevent litigation, and float the economy? The answer, of course, is many things. While necessary, these solutions are, however, often politically controversial, poorly executed, or simply ineffective.
In a new draft paper, Contracting COVID: Private Order and Public Good, I explore ways in which contract can be a substitute for, or supplement to, public institutional responses to the crisis. I focus on health-safety terms, the subject of today’s post, and standstill/tolling agreements, which I address in tomorrow’s post. Both have important capacities that public institutions lack. They are (or can be) voluntary, tailored, and capable of transmitting standards through networks which may cross sovereign boundaries. They can thus overcome important limitations of public intervention, including politicization, overbreadth and jurisdictional constraints.
Take health safety. We might assume that government will provide and enforce standards to determine how to reduce the spread of COVID. Indeed, many government actors have sought to do so, including the Centers for Disease Prevention and Control (CDC) and state public health agencies. But their efforts were hampered not only because we understood little about transmission patterns early in the pandemic, but also because there was often active resistance to health-safety mandates on liberty and/or economic grounds. This resistance, in turn, led to conflict and confusion about the scope of public health interventions and whether they were properly tailored. Sometimes, government actors told us to shutdown; other times, they told us the virus was a “hoax.”
Contract can play an important role here by offering a degree of certainty that public institutions have failed to provide. Many market actors, for example, may want assurance that they will not have legal liability for the transmission of COVID, and so seek contractual releases to this effect. It is likely that we all have agreed to exculpate restaurants, schools and gyms in the event we were to become infected while on premises. Although theories of liability are not well formed at this point, such agreements may provide some comfort that the beneficiary will not be liable on whatever theories may eventually develop.
Under cases such as Tunkl v. Regents of Univ. of Cal., 383 P.2d 441, 443 (Cal. 1963), health-safety waivers are generally enforceable unless they offend “public policy.” While reasonable minds can differ about the meaning of “public policy,” it is not hard to see that there might be a problem here. Waivers that reduce or eliminate the risk of liability might shelter poor health-safety practices. Conversely, a blanket ban on health-safety waivers might create unacceptable levels of risk.
Contracting COVID argues that such waivers should generally be enforceable if the party exculpated from liability can show that she took reasonable health-safety precautions notwithstanding the reduced risk of liability. But this may be easier said than done, if public actors fail to provide clear guidance on how to proceed.
This is where contract may help. In some cases, it appears that market actors with sufficient power, such as Apple and Tesla, have embedded health-safety standards in their supply chain agreements. Thus, they may require their contract counterparts, and perhaps others throughout the chain, to undertake practices that promote health safety in the workplace and, by extension, in dealings with the public. Apple would do this not out of the goodness of its heart, but in order to stabilize its supply chain.
In principle, this can be powerful. Contract terms are likely to be more detailed and tailored to the parties’ needs and capacities than public-health mandates, alone. Apple, for example, might negotiate the sorts of protections it believes its suppliers should take, and those negotiations should produce mutually acceptable standards in more cases than not. It might not get all that it asks for, of course, and it might have to share the costs of implementing new precautions. But a negotiated set of standards acceptable to both parties may be as good as, or better than, the confused and conflicting signals we’ve gotten from government thus far. Apple may, for example, require that its suppliers provide their employees with personal protective equipment.
Moreover, embedded in multinational supply contracts, these health-safety standards could cross borders, and apply to parties who have agreed to them in foreign jurisdictions where domestic law governing Apple might not otherwise reach.
At the same time, contract dampens liberty-based objections to such standards. If Apple’s suppliers agree to these precautions, they are not being forced to do so in the same way as if health-safety agencies mandated the standards. Contract can depoliticize pandemic precautions because it is “just business”—not the “nanny state.”
Thus, the pattern that we should encourage aligns incentives in a way that are socially valuable in the light of COVID. COVID waivers would be “carrots” available only if the beneficiary has undertaken health-safety precautions, and compliance with those precautions may demonstrate the willingness of buyers or suppliers to adapt their business practices.
Obviously, contract is imperfect. Most companies are not Apple or Tesla, and so lack the power and incentives to seek and obtain health-safety promises in supply chain or similar network agreements. Moreover, there is no guarantee that the agreed standards will in fact be the right standards. Although certain baselines seem to be emerging (e.g., masking), there is still much we do not know about how to address the pandemic. There is no reason to expect market actors who are not health experts to have special purchase on this problem.
And, inevitably, there are all of the ordinary problems that come with terms that seek “social responsibility” on the part of contract counterparts, including monitoring, enforceability and remedy. After all, companies may market themselves as socially responsible without meaningfully practicing what they preach, and there may be little in the way of vetting or enforcing their promised better behavior. These costs of contracting are important, and cannot be ignored. But they do not necessarily outweigh the potential benefits that come with it. Apple and Tesla are using contract to achieve health-safety goals because they know, implicitly or explicitly, that government by itself cannot do the job.
*Earlier versions of this essay or aspects of it were presented to the National Business Law Scholars Plenary, the Business Law Section of the American Bar Association, the Fellows of the American College of Commercial Finance Lawyers, the Association of Commercial Finance. Errors and omissions are mine, alone. © 2020, Jonathan C. Lipson, all rights reserved.