Thursday, February 23, 2023
The Dynamic Theory of Contracts
There are many theories of contract law but in my opinion the one that best explains what contract law is and what it should be is Professor Mel Eisenberg’s dynamic theory of contracts. Prof. Eisenberg described his theory in a symposium article, The Emergence of Dynamic Contract Law, 88 CAL. L. REV. 1743 (2000) and further expounded on it in his masterful book, Foundational Principles of Contract Law (2018). In his article, Eisenberg states that rather than being used to support doctrine, principles of contract law should reinforce social values. He explains that doctrines are not “self-evident or established by deduction”; rather “social values… underlie doctrinal stability.” (at 1753) In Eisenberg’s view, contract law should be “individualized rather than standardized, subjective rather than objective, complex rather than binary, and dynamic rather than static.” (at 1745)
In Foundational Principles of Contract Law, Eisenberg elaborates on four underlying principles of contract law. These four principles are:
- The aim of contract law should be to effectuate the objectives of parties to promissory transactions, provided appropriate policy and moral conditions, such as freedom from duress and fraud, are satisfied, and subject to appropriate constraints, such as capacity and legality.
This is the first and most basic underlying principle of contract law.
- The conditions to and the constraints on effectuating the objectives of parties to promissory transactions, and the way in which those objectives are to be ascertained, should consist of those rules that best take into account all applicable and meritorious policy, moral, and empirical propositions. When more than one such proposition is applicable a court should exercise good judgment to give each proposition appropriate weight considering the issue at hand and, based on those weights, should either subordinate some propositions to others or formulate a rule that is the best vector of the applicable propositions, given their relative weights and the extent to which an accommodation can be fashioned that reflects those weights.
- Where contracting parties have not explicitly or implicitly addressed an issue, the issue should be governed by a default rule whose content is determined in the same way that the condition to and the constraints on effectuating the parties’ objectives should be determined.
- The remaining rules of contract law- such as those that govern the enforceability of promises, remedies for breach of promise, excuse for nonperformance of enforceable promises, the effect of nonfulfillment of conditions, the rights of persons who are not parties to a contract but would benefit by its performance-should also be determined in the same way.
But how should a court determine the weighting of various policy, moral and empirical propositions? This is where dynamic contract law might appear to stall because it intersects with real world judges who come to the bench with their own worldview and values. Certainly, there is plenty of lip service to the belief that judges only call balls and strikes, but those calls can be pretty subjective. A judge with a law and economics worldview might weigh efficiency more heavily than equity. A judge with a distributive justice worldview might weigh equity more heavily than efficiency or predictability. Dynamic contract law considers a multiplicity of values. Furthermore, rather than relying upon the text as the sole basis for determining contractual obligations, a dynamic approach considers the context of social and business interactions, the background norms and practices that are the implied terms of contracts.
A dynamic approach is reflected in the Restatement Second of Contracts rather than the formalistic approach of the Restatement First. Dynamic contract law prioritizes what the parties expect to get out of the transaction and is manifested by the standard of reasonable expectations. Reasonable expectations essentially starts with the (actual, subjective) intent of the parties, and assesses it within the context of social norms and the need to protect the security of transactions. The contractual language helps prove what those expectations are but is not be determinative if there is other persuasive evidence.
Eisenberg explains that generally there are three basic categories of contract theories: formalist, interpretive, and normative. Formalist theories “treat doctrine as autonomous from policy and morality.” (p. 9) In other words, doctrine is self-evident and axiomatic, and rules are what matters, rather than a way to get to what matters. Interpretive theories seek to rationalize or justify the doctrine. They seek to explain why the law is the way it is, rather than aspire to something better. The problem with interpretive theories is that their application “will often result in an undesirable body of contract law because the aim of the theory is not to produce the best possible contract law but only an intelligible order in the law.” (p. 16). Normative theories seek to formulate “the best possible rules” of contract law. They can be monistic or pluralistic. Dynamic contract law is normative and pluralistic.
But how does dynamic contract law fit into the contracting world we live in today, where adhesive terms hijack people who have no intention of entering into a legally binding “transaction” – who may not read or even see the terms - and where courts recognize those terms as contracts? How can it explain cases like ProCD v. Zeidenberg and Fteja v. Facebook, Inc., which ignore contracting realities and intent? In a world where contracts formed by “reasonable notice and manifestation of consent” vastly outnumber those formed by mutual assent, is dynamic contract law obsolete?
The standard of “reasonable notice and manifestation of consent” used in wrap contract cases (clickwrap, browsewrap, etc) is itself dynamic as it accommodated changes in contracting culture driven by technology. But the way that the standard has been applied often ignored intent and weighed too heavily the values of efficiency and predictability, while ignoring other values. Dynamic contract law starts with intent and while it recognizes the value of efficiency and its role in contracts law, it recognizes other values as well. Dynamic contract law expressly rejects single-value approaches and so does not rationalize or justify the ProCD line of cases that ignore contracting realities and seem to value only transactional efficiency. It is a theory, not magic. It explains what the law and by extension, judges, should do, but it has no power to make them do it.
The early Internet contracting cases reflected a certain judicial unfamiliarity with technology, a reluctance to stifle online commerce, and a deference to a definition of efficiency which was both too narrow (as it was limited to eliminating transactional hurdles) and paternalistic (as it presumed what consumers wanted and ignored what they themselves said they wanted). However, more recent cases have shifted toward an application of the standard that better reflects the online contracting experience and the various considerations raised by a particular contract. More notice is required for certain provisions (e.g. arbitration, fees) than for others (e.g. codes of conduct). Several cases suggest that the blanket assent approach is being replaced, at least in the online context, with a specific assent requirement. The Ninth Circuit, perhaps the most dynamic of courts, in cases like Berkson v. Gogo and the more recent, Berman v. Freedom Financial Network, LLC have taken a close and careful look at the context in which terms are presented, as well as what those terms are. State courts have been even more dynamic in their approach, and have engaged in a careful contextual analysis to determine online assent to specific terms, including the “website flow” and whether the drafter could have presented terms in a more visible manner. The contextual, fact-intensive inquiry that many courts are now engaging in when assessing notice indicates that a course correction is taking place regarding how the standard of reasonable notice and manifestation of consent is being applied. Dynamic contract law is alive and well.
A symposium on Eisenberg’s work would not be complete without at least some discussion of his teaching. I had the great fortune of being a student in Prof. Eisenberg’s small contracts session. I had absolutely no interest in the subject or anything having to do with corporate or business law. Of course, I knew that Eisenberg was a giant of contract law which only made the prospect of being in his small section more terrifying as there would be no place to hide if he called on me.
It was clear that he expected the most from us 1Ls, but his were reasonable expectations -- he was not the kind of professor who sought to dominate or humiliate his students like some Prof. Kingsfield clone. Prof. Eisenberg made the subject of contracts interesting, less about boring fine print and more about the actions (and yes, intent) of people and businesses. His love for the subject was contagious and his kind, respectful, and inclusive manner of soliciting participation made what could have been an intimidating subject my all-time favorite. Notably for such a prolific and serious scholar, Prof. Eisenberg discussed practical issues that I would remember years later as a practicing attorney. Rules such as the parol evidence rule were taught in context, and he pointed out where doctrine (e.g. modifications) could be changed by contract (e.g. a NOM clause) and vice versa, and how both could be affected or altered by legislation. As a teacher, too, Eisenberg’s approach to contract law was dynamic.
Related posts from the Mel Eisenberg Symposium:
Posts from the second week:
Virtual Symposium on the Contracts Scholarship of Mel Eisenberg, Part V: Introducing the Second Week