ContractsProf Blog

Editor: Jeremy Telman
Oklahoma City University
School of Law

Friday, October 11, 2024

Two Takes of Freedom of Contract, Part I: Rebecca Stone

Rebecca Stone's Putting Freedom of Contracts in Its Place, forthcoming in the Journal of Legal Analysis, begins with the puzzle of penalty clauses. If two parties agree to an award for breach of damages in excess of expectation, why should a court not give effect to their bargain? Most contracts theorist, whether coming from a welfarist or a rights-based perspective, can't think of a reason, but Professor Stone can.  It comes through her democratic, rights-based conception of contracts. Parties' freedom to structure their transactions is cabined by the requirement that such transactions realize substantive justice. (3)  While Professor Stone thus places substantive and procedural constraints on freedom contract, she preserves a vast area for freedom of contract to operate in the realm where there is good faith normative uncertainty about substantive justice. (3-4) For Professor Stone, "the point of contract law is to provide a just framework for the settlement of normative uncertainty about substantive justice in a way that honors democratic egalitarian commitments."

Professor Stone's article provides a nice roadmap for people seeking to navigate theories of contracts law. She first lays out welfarist and deontological justifications of sovereignty theory (7-18). Welfarists conceive of contracts law as a system of rules worked out by private parties capable of imagining all possible permutations and contingencies. The rules arrived at through his iterative process ultimately become legal norms enforced by courts. (7-10) So it is in theory. In reality, parties cannot really conceive of all possible permutations, but welfarists prefer a rather formalist take on contractual agreements, trusting the parties to come closer to memorializing their true intents ex ante rather than courts to try to work things out ex post. (10-11). Professor Stone expresses some skepticism as to whether the welfarists' instinctive deference to private ordering is justified, especially with respect to procedural matters. (11-12) 

Deontological justifications of sovereignty theory turn on the claim that it is always just and fair to hold parties to agreements reached under just and fair conditions. (12) Professor Stone provides ground to question this claim. First, sovereignty theory fails to adequately address the problem of background injustice. Second, it fails to provide a satisfying justification for why courts should defer to the parties' solutions to procedural and remedial challenges where those solutions are the product of the parties' imperfect motivations. (12-17)

Professor Stone next presents her own democratic theory of contracts (18-28). In short, she argues that, given normative uncertainty and the role of contracts in settling that uncertainty, agreements deserve our respect only when they represent good-faith attempts to settle normative uncertainty by people authorized to do so. (18)

That might seem a bit abstract, but Professor Stone then illustrates the implications of her theory in the doctrinal contexts of unconscionability (31-34), good faith negotiation (34-35), remedial clauses (36-39), substantial performance, conditions, and forfeiture (39-44), and contract interpretation (45-46).  Her discussion of unconscionability negotiates the tension between free choice and paternalism, noting that both must be reconciled with substantive principles of justice. With respect to good faith negotiations, Professor Sone argues that the courts have a role in policing the negotiation process "to ensure that parties are seeking to do justice rather than striving for advantage during deliberations." (35)

Sovereignty theorists generally think courts ought to enforce the remedial schemes that the parties chose, even if those choices entail penalties or one-sided limitations on damages.  Professor Stone describes her approach as "more cautious." (36) Parties can use remedial measures, even penalty clauses, as risk-allocation devices, so long as the parties' perceive their risk allocation as plausibly just. (37-38). Settlement agreements are likewise enforceable so long as the they plausibly settle normative uncertainty. (39)

Kent's HouseHer discussion of conditions and substantial performance winds up pretty much where Cardozo winds up in Jacob & Youngs v. Kent.  That case was rightly decided because the parties did not condition Kent's obligation to pay on the use of Reading pipe.  Had they done so, we would have had to consider whether enforcement of the parties' agreements could be the result of a good faith attempt to operate within the realm of substantive fairness, expanded to account for normative uncertainty. (41-43)

Next, Professor Stone discusses what she calls "implied excusing conditions." For some reason she treats mistake as an excuse. As in other areas, she departs from sovereignty theory's preferred outcome in such cases only to the extent that she would allow for excuse of performance, notwithstanding contractual allocation of risk, when the risk is so unforeseen as to make it seem unlikely that the parties really considered what justice required in the case of the occurrence of a remote risk.  I think I would treat that question differently with respect to mistake, but I need to think about that more.  

Her take on interpretation seems to accord more with legal realist contextualism.  Formalism is to be avoided if doing so leads to substantive unfairness. Ultimately, Professor Stones's view is that sovereignty theory does fine under ideal conditions but has a harder time achieving to address departures from the the ideal. We should generally defer to the parties' intentions, to the extent that we can discern them. However, if those intentions cannot be squared with a plausible account of the duties the parties owe to one another, courts ought not to enforce agreements to the extent that the results are immoral.

Next up: Hanoch Dagan.

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