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Contract in Crisis

Emily Strauss, Crisis Construction in Contract Boilerplate, 82 L. & Contemp. Probs. 163 (2019).

Oddly enough, contract law may help quell at least some of the panic that comes with a pandemic. Sure, contract doctrine can’t tell us about the spread of the COVID-19 virus. But Emily Strauss’ article Crisis Construction in Contract Boilerplate shows how courts adeptly and quietly helped the economy recover during the 2008 financial crisis. She tracks the surprising outcomes and rationale of cases allocating risk among loan originators, investors in residential mortgage backed securities (RMBS), and insurers in those transactions, and reports that they followed a method of contract interpretation she dubs “crisis construction.” Faced with “sole remedy” contract clauses in asset securitization contracts that simply could not remedy the magnitude of losses that investors and insurers suffered, courts abandoned the plain language of those standard clauses in favor of a plaintiff-proposed equitable alternative. That method, Strauss contends, helped restore investor confidence and right the economy.

Those of us who value predictability of contract law—and the rule of law more generally—will be relieved to hear that the judicial rejiggering only lasted a few years. As the economy was getting back on track in 2015, courts quietly reverted to the ordinary course of judicial business by enforcing those “sole remedy” allocation-of-risk clauses.

In short, Strauss demonstrates that common law injected equity in a crisis. To this reader, that displacement of the plain meaning of the risk allocation clauses is not as inconsistent with the parties’ intent as it may initially appear. Instead, the judiciary’s equitable revision of the written provision arguably followed the prime directive of contract law to enforce the parties’ intent by inserting a reasonable substitute for the plain meaning when circumstances stray so far from foreseeability and practicality that reasonable parties would intend an alternative remedy.

Hotels, restaurants, airlines, retail businesses, and manufacturers who are just beginning to absorb the shock of widespread business shut-downs, event cancellations, and interruptions in supply chains will comb through their contracts hoping that a force majeure clause protects them. Regardless of how that boilerplate reads, we should all take heart that the doctrine and practice of contract law provide a model for equitably allocating the risks of losses that occur in an unprecedented—and thus unforeseeable—crisis.

The Problem: Unusable “Sole Remedy” Clauses

Here’s the problem. One key way that governments counter economic crises such as the Great Depression, the Great Recession, and the 2020 COVID pandemic is to lower interest rates near zero. When that didn’t do the job to counter the Great Recession, the judicial branch quietly used its own tool of crisis construction to ease investor fears. Strauss’s article give us an insider’s view, gleaned from her time as a lawyer in litigation that allocated losses in the wake of the 2008 financial crisis.

Strauss efficiently explains the transactions at the heart of the financial meltdown (P. 167):

  • Loan originators or “sponsors” bundle mortgages as assets;
  • Special Purpose Entitles (“SPEs”), often trusts, acquire the bundle and sell shares in a Mortgage Loan Purchase Agreement and Pooling and Service Agreement;
  • Investors buy the shares; and
  • Insurers pay investors if mortgages don’t pay a certain amount.

The contracts between the sponsors and the SPEs have the sponsor represent and warrant that the mortgages conform to specific guidelines such as property appraisal and no default or delinquencies, and that all information in the mortgage paperwork is true. (P. 168.) The contracts also specify three possible remedies for breach of those representations and warranties such as failing to appraise the property. The sponsor can cure the breach, can substitute a compliant loan for the non-compliant one, or repurchase the loan. (P. 168.) The party demanding that the sponsor repurchase the loan must show that the loan “materially and adversely” breached a representation and warranty. (P. 170.) The contracts unambiguously designate these as the “sole remedy” for breach.

The Solution: Instead use Equitable Sampling Remedy

Enter cases like Syncora Guaranty Inc. v. EMC Mortgage CorP. The court balked at examining nearly 10,000 loans one-by-one to identify breaches such as missing verification of a debtor’s employment, the materiality of each breach, and an appropriate repurchase price. The judge emphatically refused to use the boilerplate remedy in a footnote:

The repurchase protocol . . . is appropriate for individualized breaches. . . . That is not what is alleged here. . . . Accordingly [the sponsor] cannot reasonably expect the Court to examine each of the 9,871 transactions to determine whether there has been a breach, with the sole remedy of putting them back one by one. 1

Strauss tells us that this fact-intensive inquiry could take about two to three hours of an expert’s time, at a cost of between $300-$400 for each loan. (P. 171.) No wonder Strauss calls this court’s refusal “blistering.” (P. 184.)

Contract law had two options. Plan A would be to follow the plain meaning rule and enforce the “sole remedy” clause, which could result in impossibly time-consuming and onerous analyses and vastly inadequate remedies for plaintiffs. Plan B would be to find another way to match the breach to the losses suffered.

Strauss says this “blistering” footnote along with other cases explained why the court instead allowed plaintiffs to use a statistical sampling method to determine breach and damages by extrapolation from the sample. (P. 164.) The written agreements neither allowed nor mandated that method and the defendants strenuously objected. But court after court essentially exercised its equity powers to replace the agreed-upon remedy with one provided by the court in crisis conditions. The early decisions, Straus contends, lacked rationale or support in precedent, but created what she calls an “echo chamber” in which the later decisions could cite the earlier ones as precedential authority. By 2013 and 2014, courts justified the swap of the sole remedy clause for court-provided statistical sampling in terms of commercial reasonableness. (P. 174.)

Strauss explains the courts’ Plan B approach, suggesting that the decisions

appear to reflect the sentiment that perilous economic times called for unusual measures, and that judges should produce decisions that would make investors whole, increase investor confidence and thus stabilize and ultimately help stimulate the battered economy. (P. 179.)

That choice, often made in pretrial motions, set the stage for cases to settle in the “millions, even billions” of dollars. (P. 175.) This judicial resort to an equitable remedy in the financial crisis, Strauss argues, helped shore up investor confidence and thus the wider economy.

Paths not Taken

Strauss reviews alternative routes courts could have taken, such as opting for a different kind of Plan B. The doctrines of impracticality and frustration of purpose immediately come to mind, yet Strauss explains that those defenses typically seek to excuse non-performance. Here, the investors sought to make the sponsors meet their contractual obligations of providing high-quality loans in the bundle to be securitized. (P. 183.) Likewise non-enforceability on the grounds of public policy typically would avoid a contract instead of provide a different remedy for its breach. But if it did, the public policy of protecting public welfare could certainly justify refraining from enforcing the sole remedy clause if not the entire contract. (P. 183.)

Strauss convincingly contends that the judicial swap of statistical sampling for a loan-by-loan remedy better served the end of quieting an economic panic. A decision based on impracticability, or more likely interference with public policy, could generate headlines, provide grounds for a public and drawn-out appeal process and perhaps reversal, as well as criticism from scholars and other commentators. Instead these trial courts quietly substituted an equitable remedy for the plain language of a contract. The sub rosa quality of the approach, Strauss explains, “provided a quiet, flexible medium for judges to stabilize investor confidence.” (P. 186.)

Once the economy and culture were safely on track toward ordinary life, courts became more explicit in their rationale for setting aside the sole remedy clauses in favor of statistical sampling. For example, cases in 2017 and 2018 justified their reliance on sampling on the public policy against enforcing exculpatory clauses in cases involving gross negligence. (P. 187.)

After the Crisis Passes

Among the most fascinating patterns that Strauss reveals is that courts only applied the sampling remedy for a few years. Once the economy began to recover in late 2015, courts began to revert to the “sole remedy” of loan-by-loan repurchase.2 Strauss tells us that these cases returned to the conventional approach of enforcing contracts as written without commenting on the earlier decisions that allowed sampling.

She sees this as a pattern of courts using “crisis construction” to fashion an appropriate remedy in cataclysmic circumstances that make the usual approach unusable.

That’s hardly surprising. As Strauss also explains, courts likewise construed contracts to account for major changes in the economy such as the departure from the gold standard during the Depression.3 (P. 178.)

But it did surprise me that the defects in that sole remedy and the financial collapse apparently did not make the parties edit their remedial clauses in subsequent transactions. Strauss surmises that the stickiness of these default provisions is due to the costs of revising them, and the reduced likelihood of them coming up again en mass given the protections in the Dodd-Frank Act that require lenders to assess each borrower in detail. (Pp. 190-91.)

But what really matters today—in the spring of 2020 as businesses and whole states shelter in place, borders are closed, conferences and building projects postponed or cancelled, and workers laid off—is that “crisis construction” lies at the ready for courts to resolve the many disputes that will arise from the COVID-19 pandemic. As I write in April 2020, hotels, airlines, schools, construction companies, and buyers and sellers of goods in supply chains are doubtless pulling out their written agreements and puzzling whether a force majeure clause that specifies “bacterial infection” also applies to a viral pandemic. While they puzzle over that legalese, they should read Emily Strauss’ important Crisis Construction article to find out how judges and the doctrine and practice of common law retain the flexible, quiet tools of equity to steer parties as well as the economy and wider culture back toward normalcy.

  1. 2011 WL 1135007, *6 (S.D.N.Y. Mar. 25, 2011). See also MBIA Ins. CorP. v. Countrywide Home Loans, 2010 WL 5186702 (N.Y. SuP. Ct. Dec. 22, 2010); MBIA Ins. CorP. v. Credit Suisse Sec. (USA), LLC, 927 N.Y.S.2d 517 (N.Y. SuP. Ct. 2011); Assured Guaranty Mun. CorP. v. Flagstar Bank, 2011 WL 5335566 (S.D.N.Y. Oct. 31, 2011); Assured Guaranty Mun. CorP. v. DB Structured Prods., Inc., 2014 WL 3282310 (N.Y. SuP. Ct. July 3, 2014).
  2. See, e.g., MASTR Adjustable Rate Mortgages Trust 2006-OA2 v. UBS Real Estate Sec., Inc. (MARM-20060OA2), 2015 WL 797972 (S.D.N.Y. Feb. 25, 2015); Homeward Residential, Inc. v. Sand Canyon Corp., 2017 WL 5256760 (S.D.N.Y. Nov. 13, 2017).
  3. David Glick, Conditional Strategic Retreat: The Court’s Concession in the 1935 Gold Clause Cases, 71 J. Pol. 800 (2009).
Cite as: Martha Ertman, Contract in Crisis, JOTWELL (April 6, 2020) (reviewing Emily Strauss, Crisis Construction in Contract Boilerplate, 82 L. & Contemp. Probs. 163 (2019)), https://contracts.jotwell.com/contract-in-crisis/.

Pirates, Roverts, Thieves and Boilerplate

Gregory Klass, Boilerplate and Party Intent, 82 Law & Contemp. Probs. no. 4, 2019, at 105.

In Boilerplate and Party Intent, just out in Law and Contemporary Problems, Greg Klass unearths the following lovely piece of boilerplate from an insurance contract:

“Touching the Adventures and Perils which we the Assurers are contented to bear and do take upon us in this Voyage, they are, of the Seas, Men-of-War, Fire, Enemies, Pirates, Roverts, Thieves, Jettisons, Letters of Mart and Counter-mart, Suprisals, Takings at Sea, Arrests, Restraints and Detainments of all Kings, Princes, and People…”

Roverts! Counter-marts! Oh my. As Klass observes, this sort of clause is an example of non-negotiable boilerplate, which propagates in part because no one would dream of altering such hoary text. But it is also an exemplar of a type of contractual clause that is interpreted without regard to the parties’ intent, even if what particular signatories wanted “Suprisals” to mean could be ascertained.

Non-negotiable boilerplate can arise from the passage of time—the Adventures and Perils clauses joins other grotesques (pari pasu!) in the category of too hard to change. But so too can boilerplate arise from mandatory clauses which the law requires to be inserted into contractual writings. Such mandatory clauses include, for example, uniform covenants that the FHA and HUD mandate in federally-insured mortgages. For language inserted by time and by the government, stating that the goal of interpretation is to effect intent is clearly incorrect. Rather, as Klass observes, courts may be seeking to give life to the government’s meaning, or that of the shared community of jurists and lawyers who have interpreted and parsed these clauses over time. Klass thus distinguishes the author of clauses from the authorizer. When the two are different, it is the authorizer’s intent, not the drafter, that ought to control. (This argument has particular weight in the insurance market, where the regulator’s interpretation perhaps is more important than the parties to the insurance contract itself.)

Klass also includes a very interesting discussion of Restatement 2nd 212(2). He describes a set of procedural decisions about class certification in adhesive consumer contracts that are likely not on the radar of contract scholars. Courts, it seems, have used Section 212 to certify classes against defendant objections that extrinsic evidence would preclude Rule 23 certification. Plaintiffs have responded, mainly successfully, that Section 212 precludes evidence of the parties’ actual intent in such boilerplate examples. Why? Because only such uniform interpretations give life to non-drafting parties’ rights in the micro-harm setting present in most class adjudication. That is, ignoring the actual parties’ reasonable understandings is necessary to vindicating their global rights.

Though Klass does not quite say so, his approach to boilerplate interpretation can be usefully counterpoised to two recent attempts to bring contract interpretation forward from the dark days of Latin canons to the golden dawn of big data. Recent work by Omri Ben-Shahar and Lior Strahilevitz (arguing for surveys) on the one hand, and Stephen Mouritsen (corpus linguistics) on the other both argue that better data can get us more precise answers to what boilerplate meant to the parties. Klass offers a sophisticated and nuanced challenge to that goal. Sometimes, he argues, boilerplate should be interpreted in ways contrary to party intent, facts (and Pirates, Roverts and Thieves) be damned. This is a counterintuitive thesis, supported with a wealth of examples, and written in an engaging style. I recommend it to you.

Cite as: David Hoffman, Pirates, Roverts, Thieves and Boilerplate, JOTWELL (March 4, 2020) (reviewing Gregory Klass, Boilerplate and Party Intent, 82 Law & Contemp. Probs. no. 4, 2019, at 105), https://contracts.jotwell.com/pirates-roverts-thieves-and-boilerplate/.

Hidden In Plain Sight and In All-Caps

Yonathan A. Arbel & Andrew Toler, All-Caps (January 15, 2020), available at SSRN.

A strange thing has been happening in the world of consumer contracts. “Contract” is being elbowed–roughly–aside by “notice.” While contract requires offer, acceptance, mutual assent and consideration, notice seems to require only conspicuousness. Accordingly, it is important that we get conspicuousness right. Unfortunately, too often, we get it wrong. One of the most common ways we get it wrong, as Yonathan A. Arbel and Andrew Toler explain in their article, ALL-CAPS is by relying upon the effectiveness of capitalized text. Their article, the first to test the effect of capitalized text upon consumer perception, shows that all-caps not only fails to improve the quality of consent, it may diminish it for some consumers.

Arbel and Toler argue that capitalization of contract clauses is treated by judges, legislators and consumer agencies as “strong evidence, often dispositive, that the text was read and understood by the consumer.” (P. 5.) Consequently, all-caps is “used to show meaningful consent to especially onerous terms that would not be enforced but-for the use of all-caps.” (P. 10.) They review the background surrounding this faith in all-caps and find that, despite its pervasiveness, it is based upon “speculation and intuition.” (P. 6.) They explain how the focus on conspicuousness was intended to be a sort of compromise, the idea being that even if consumers don’t read all the terms in form contracts, they could read conspicuous key terms.  All-caps became “a widely endorsed method of making a term conspicuous and thus rendering it enforceable.” (P. 5) But the evidence for this support of all-caps, they note, was nowhere to be found.

They then seek to test whether this reliance on all-caps is justified.  They collected the standard form contracts of 500 large consumer companies, such as Amazon and Uber, and analyzed them by using specially developed code that counted instances of a letter being capitalized, and attempted to classify capitalization at the word, sentence, paragraph and header level. They found evidence of too much capitalization, including that approximately 77% of contracts had at least one paragraph that was fully capitalized. (P. 19.) They then assessed whether all-caps improves “consumer consent.” (P. 20.) By consent, the authors seem to mean “informed consent” as distinguished from a mere manifestation of consent, which is required for contract formation. They state that conspicuousness could arguably improve consumer consent in three ways: it could help the consumer “economize” the consumer’s attention by directing it to the most important terms; it could improve readability; and/or it could enhance deliberation by slowing down reading times. (P. 20.) They come up with a “testable hypothesis” for all these possibilities: “other things beings equal, the consumer would have better recall of the conspicuous term than if the term was inconspicuous.” (P. 21.) The provision in all-caps had to do with the cancellation policy for a free trial and whether consumers could recall and understand its meaning.

I don’t think we even need a drum roll for the results since they are, unfortunately, predictable. It turns out that with “high statistical significance” all-caps do not enhance consumer consent and low caps is no worse than all-caps. (P. 27.) But what may be surprising is that capitalization may diminish the quality of consent, at least for those respondents who were older than 55 years of age (60% got questions regarding the cancellation policy wrong in the all-caps group and 31% in the low-caps group) (P. 31.) All-caps didn’t increase salience, it didn’t make the text easier to read, and it didn’t seem to focus reader attention to important terms. The authors hypothesize that all-caps actually make it harder to read the text! In fact, the authors suggest that ALL-CAPS is akin to textual yelling! (P. 47.) And who wants to deal with textual yelling?

The authors then undertook several exploratory studies, testing all-caps in different settings, including time pressure and other modes of highlighting. THEY FOUND THAT ALL-CAPS WAS NOT HELPFUL BUT THAT THE USE OF BOLD MIGHT BE. (P. 51) (I think the use of italics might also be effective, don’t you agree? But only if used sparingly).

The purpose of testing these other treatments was not to suggest one surefire way to enhance consumer consent. On the contrary, the authors caution against safe harbors such as capitalized text or boxes – or even bold. Too much of anything causes habituation which in turn leads to inattention. As long as the bold is not overused, it can be an effective strategy. If everything is in bold, however, then it becomes harder to differentiate the important bolded text from that text which is much less important.

The authors point out that firms seem to know very well how to communicate with consumers when they are trying to get them to buy something. Marketing materials contain a “rich, creative mix” of text sizes, colors, and typefaces and “one never finds…blocks of capitalized text, i.e., all-caps.” (P. 46.) There may be the occasional all-cap word here and there but “blocks of homogenous capitalized text are all but absent.” (P. 46.)

Arbel and Toler have some suggestions based on their findings, the most promising being the application to contracts of Lauren Willis’s performance-based approach to consumer law. 1 (P. 53.) Their proposal, adapted for contracts, would find certain key terms by default unenforceable unless the firm could prove that the term was conspicuous. Others have made similar suggestions regarding this type of burden shifting, and it is unclear how their proposal would differ from these other proposals. But the authors state that they leave “the full case for performance-based conspicuousness” for a later day. (P. 55.) They have done enough for today, by making a strong case against the upper case.

  1. Lauren E. Willis, Performance Based Consumer Law, 82 CHI. L. REV. 1309 (2015) https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2485667.
Cite as: Nancy Kim, Hidden In Plain Sight and In All-Caps, JOTWELL (February 6, 2020) (reviewing Yonathan A. Arbel & Andrew Toler, All-Caps (January 15, 2020), available at SSRN), https://contracts.jotwell.com/hidden-in-plain-sight-and-in-all-caps/.

The Power of Default: Path Dependence in the Drafting of Commercial Contracts

Julian Nyarko, Stickiness and Incomplete Contracts (Sept 1, 2019), available at SSRN.

According to prevailing conceptions, the primary role of contract law is to give effect to the parties’ will (the so-called will theory of contract), thereby enhancing overall human welfare (the standard law and economics perspective). Thus, the law may legitimately intervene in the content of contracts, or otherwise try to influence the contracting process and its outcomes, only if there is some flaw in the contracting process (such as duress) or if there is a market failure (such as a monopoly or an acute information problem). In recent years, the notion of market failure has been extended to encompass behavioral market failures as well—that is, deviations from the assumption that people are invariably rational maximizers of their own utility. However, it is still commonly believed that the need for compulsory (mandatory rules) or choice-preserving interventions (nudges) is limited to transactions with relatively weak and unsophisticated parties—such as consumers, employees, and tenants. When it comes to commercial transactions in competitive markets, the very fact that a contract does or does not contain a given term is perceived as a proof that that term (or its absence) is optimal—that is, maximizes the joint surplus of the parties. Otherwise, why would sophisticated parties include (or fail to include) that term in the contract? In fact, some scholars have grounded an entire theory of contract law on such strong belief in the rationality and competence of commercial contracting parties (Schwartz & Scott).

Until recently, people’s beliefs about these issues were primarily based on anecdotal evidence, personal experience, and ideological inclinations. With the advancement of empirical legal research, observational and experimental studies offer more reliable and systematic evidence about such matters (which does not mean, of course, that ideology ceases to play a role, as people often do not allow themselves to be confused by the facts). In his intriguing new research, Julian Nyarko uses cutting-edge methods of machine learning to study the inclusion or non-inclusion of choice-of-forum clauses in hundreds of thousands of contracts contained in a dataset of commercial agreements reported to the U.S. Securities and Exchange Commission (SEC). He then examines what factors might explain the inclusion or non-inclusion of such clauses in any agreement.

The study found that, while 75% of the contracts in the dataset include a choice-of-law provision, only 44%—less than half—include a choice-of-forum clause. (P. 32.) The latter figure is surprising, given the potentially large practical importance of choice-of-forum clauses (Pp. 10–19) and the prevalent opinion among practitioners that failing to include such a clause verges on malpractice. (P. 63.) Surprisingly, firms do not show consistency in this regard. While very few firms consistently include (or fail to include) such clauses in all (or any) of their agreements, most firms display considerable variance in this respect: the consistency measure—ranging from 0 (choice-of-forum not included in any of the firm’s contracts) to 1 (choice-of-forum included in all of the firm’s contracts)—is normally distributed around 0.5. (Pp. 33–34.) Similar inconsistency is revealed when breaking down the data by industry. (P. 35.) Unsurprisingly, choice-of-forum clauses are more prevalent in some types of agreements than in others (e.g., 61% in joint-venture agreements, compared with only 47% in transportation agreements). (P. 36.) Such clauses are also more prevalent in contracts drafted by leading law firms. (Pp. 38–40.)

If neither the consistent preferences of firms nor the types of industry or agreement explain the decision as to whether or not to include a choice-of-forum clause in an agreement, are there other observable variables that can explain it? It turns out that whether or not a choice-of-forum clause is included in the contract is largely determined by the lawyers that draft the contract. Moreover, in this regard lawyers do not appear to prioritize their own interests over those of their clients. Rather, there is strong evidence to suggest that “whether or not the final contract includes a choice-of-forum provision is determined almost exclusively by the template that a law firm uses.” (P. 7.)

Admittedly, given the observational (rather than experimental) nature of the study, there was an outside chance that “reverse causality” might be at play—namely, that firms hire lawyers who use the most beneficial template for each of their deals. However, the study largely rules out this theoretical possibility by examining the impact of two “external shocks.” One is the fact that some law firms collapsed during the period of observation, thus forcing firms and clients to hire new external counsel. (Pp. 44–46.) The other is significant changes in the legal default rules concerning the courts’ jurisdiction, which appear to have had no noticeable impact on the inclusion or non-inclusion of choice-of-forum clauses. (Pp. 50–58.)

The author readily (and commendably) concedes the limitations of the study. (Pp. 58–63.) For one thing, the study pertains to a particular type of term, which usually does not attract the attention of the negotiating parties, or even their lawyers. More studies are necessary to examine the generalizability of the findings with regard to both primary and secondary contract clauses. For another thing, the study only analyzes observable variables—primarily those that can be extracted from the dataset—and one cannot rule out the possibility that the inclusion or non-inclusion of choice-of-forum clauses in contracts is determined or mediated by other, unobservable factors.

Notwithstanding these limitations, the findings are intriguing, and their potential policy implications important. First, the findings highlight the role of lawyers in commercial transactions—thus questioning the common treatment of each contracting party as a unitary entity. The findings also cast doubt on the attempt to derive normative conclusions from observations of prevailing provisions in commercial contracts (see, e.g., Benoliel).

Furthermore, the strong evidence suggesting that whether a choice-of-forum clause is included in a contract is determined by the language of the boilerplate used to prepare the first draft (rather than by any rational deliberation), lends support to the observation that cognitive heuristics and biases—in this case, the status quo and omission biases that result in a default effect (Zamir & Teichman, Pp. 48–50)—are not limited to laypersons making mundane decisions (see Id., Pp. 114–17). They affect even top-tier professionals who charge large sums of money to handle transactions worth millions of dollars. This observation must be taken into account even if one is solely interested in maximizing overall social utility, to the exclusion of any other normative concern. Among other things, it bears upon the design of legal default rules, and on the appropriate division of labor between the contracting parties and the law (see also Zamir; Ayres).

Finally, Nyarko (P. 65) aptly offers a more general lesson for legal theory in contract law and beyond: rather than trying to theorize away gaps between expectations and reality, we should try to understand these gaps.

Cite as: Eyal Zamir, The Power of Default: Path Dependence in the Drafting of Commercial Contracts, JOTWELL (January 8, 2020) (reviewing Julian Nyarko, Stickiness and Incomplete Contracts (Sept 1, 2019), available at SSRN), https://contracts.jotwell.com/the-power-of-default-path-dependence-in-the-drafting-of-commercial-contracts/.

Enjoy the Little Things

Emily Kadens, Cheating Pays, 119 Columbia L. Rev. 527 (2019).

According to Columbus, the protagonist of Zombieland (2009), “enjoy the little things” is Rule #32 for surviving a zombie apocalypse. Professor Emily KadensCheating Pays explores the darker side of enjoying the little things against the backdrop of the 1622 trial of a London grocer, Francis Newton. Specifically, Professor Kadens argues that in the context of cheating by heavily networked commercial actors, it is the little things—small-scale but regular cheats in transactions with contracting partners—that pay off in the end. Small cheats are potentially more lucrative than large cheats because small cheats are unlikely to be discovered or may be discounted as mistakes even if discovered, the cheater can take steps to misdirect attacks on the cheater’s reputation, and contracting partners are unlikely to take significant measures to punish the small-scale cheater even after the cheats are discovered.

In this sordid tale of petty lies, betrayal, and revenge, the villain was not particularly glamorous nor interesting in terms of the scale of his misconduct. Francis Newton was a successful grocer who routinely cheated customers and suppliers by subtly altering the length of balance scale arms, substituting low quality goods in sales to buyers, changing tare weight markings on shipping containers, and secretly attaching extra weights to scale platforms. These cheats presented lighter weights on goods sold by suppliers and heavier weights on goods sold to customers. Newton apparently carried on this scheme of regular, small-scale cheats for at least a decade before rumors of his dishonesty began to spread. Although earlier cheats had been discovered by others, it was not publicly sanctioned until Newton’s enemies began a campaign to spread news of the cheats and ultimately bankrupted themselves bringing Newton to trial. Newton was found guilty of dishonest practices and forced to make a public apology and pay a £1000 fine. Nonetheless, Newton appears to have continued more-or-less successfully in business after that public punishment.

Professor Kadens uses this story to critique the standard trope in contract theory that fear of reputational harms will cause repeat players in business networks to resist the temptation to cheat their contracting partners. Ultimately, Kadens lays out a detailed, original, and powerful case demonstrating that while reputational concerns likely do curb large scale cheating, small-scale cheating by contract partners not only will likely go unpunished but also may not yield serious consequences for future dealings even when discovered and punished.

London grocers of Newton’s time were members of a trade guild with the power to sanction individual grocers for wrongdoing. Grocers engaged in repeated transactions with their regular customers and suppliers, but those customers and suppliers also interacted with each other and with other grocers regularly. In this network, reputational information regarding individual players could be disseminated relatively inexpensively as actors within the network shared news and gossip about their dealings with each other.

In this context, theories of private ordering predict that actors in the network have strong incentives to deal honestly with each other. Any member of the network who believes their contracting partner has behaved dishonestly can punish that behavior by spreading the news of the cheating through the network. Consequently, assuming there are no extrinsic factors controlling morality such as ethical or religious beliefs, actors in such contexts will refrain from cheating behavior where the cost of cheating exceeds the benefits. Thus, in such a system, we might expect to see a retiring corporate officer embezzling $20 million if the officer has confidence in being able to relocate to a jurisdiction with no extradition treaty because the return on investment is significantly in excess of the expected loss from discovery. But such grand opportunities are rare, especially compared to opportunities for lower level cheats such as hiding personal expenses on a corporate credit card, selling misbranded products, or cheating customers and suppliers in calculating prices. In the latter situations, private ordering theories predict that the potential reputational costs (and expected losses discounted by the likelihood of discovery and punishment) of small order cheating just aren’t worth it. In other words, potential cheaters should be guided by the maxim, “Go big or go home.”

Kadens counters this narrative by observing that many factors make regular, small-scale cheating profitable.

While private-ordering theories may accurately predict that fear of the loss of reputation will keep cheaters from committing big cheats, they do not have the same disciplinary power over small cheats. Cheaters are clever; victims can be ignorant of their victimization or unwilling to broadcast it; and gossip can be ambiguous. All of these real life factors render reputation an imperfect policing mechanism. As a result, low-level cheating may be—and indeed is—a common cost of doing business. Such low-level cheating certainly seems to have been embedded in the grocery market of early seventeenth-century England…. (P. 543.)

This article is an important insight into the limits of private ordering and insightfully analyzes the factors contributing to the success of dishonest actors even within a commercial network that should serve to impose reputational costs that should prevent cheating. As Kadens notes, it is unclear whether Newton was an anomaly or whether all actors in his network simply assumed that everyone engaged in small-scale cheating as a cost of doing business in that network. Newton’s accusers, for instance, engaged in their own small-scale cheats. While such trade expectations may ameliorate the immorality of cheating within the network, it remains that cheating reduces economic efficiency and activity. To counteract this drain, however, regulatory and private contract solutions must account for the possibility that the cost of remediation may exceed the economic benefits. At the end of the day, we may be left with the conclusions that cheating will occur and that cheating pays for those who just enjoy the little cheats.

Cite as: Daniel Barnhizer, Enjoy the Little Things, JOTWELL (November 29, 2019) (reviewing Emily Kadens, Cheating Pays, 119 Columbia L. Rev. 527 (2019)), https://contracts.jotwell.com/enjoy-the-little-things/.

Paying to be the Product

Stacy-Ann Elvy, Commodifying Consumer Data in the Era of the Internet of Things, 59 B.C. L. Rev. 423 (2018).

Just after the turn of the millennium, it was common to hear the burgeoning data economy ethically justified through the following refrain: “If you’re not paying for it, you’re the product.” Consumers, wittingly or unwittingly, pay for free services by giving companies access to their personal information and data logs.

Nobody says that anymore. Stacy-Ann Elvy’s excellent article, Commodifying Consumer Data in the Era of the Internet of Things explains why. No matter how much you pay, under current US law you’re the product if the company’s privacy policy says so. A company’s privacy policy typically is not in the contract consumers agree to and can be changed at any time. Elvy cites a study that estimates that by 2020 companies will be able to earn more profits by transferring and disclosing consumer Internet of Things (IoT) data than by selling IoT devices to the consumers themselves. This includes cars, typically the most expensive good most consumers ever purchase.1

Elvy shows how the Uniform Commercial Code (UCC), the Bankruptcy Code, and other commercial law facilitates the transfer and disclosure of consumer data. Under Article 9 of the UCC (hereafter “Article 9”), a company can increase its odds of obtaining loans on favorable terms by “securing” the loan with some asset the company has. To secure a loan means, roughly, to give the creditor the right to take the asset in the case of default, even if the debtor enters bankruptcy. That right is called a security interest. Databases of consumer information are often the most valuable asset a company has, so companies frequently obtain loans secured by these databases. The vexing scholarly question of who owns data about persons ends up not being terribly significant for secured transactions. Article 9 permits the creation of a security interest in an asset the debtor does not fully own, but the security interest would extend only to the rights the debtor has in the asset.2 Databases including consumer data can also be part of a debtor’s estate in bankruptcy, and unless the privacy policy puts limitations on the ability of the company to transfer the databases, personal information can be transferred to others who lack any of the constraints the previous company may have represented to consumers about what they would do with the data.

In this way, Article 9 and the Bankruptcy Code amplify the impact of transfer of data and encourage its transfer. Corporations borrowing money and taking risks is the lifeblood of the American economy. A company would be putting itself at a disadvantage if it did not seek to borrow against its consumer data and take advantage of secured credit. And the more control a company gives itself over consumer data in its privacy policies, the more flexible it can be in the case of bankruptcy. The shadow of what might happen if bankruptcy were to occur influences creditor and investor behavior.

Article 9 and Bankruptcy Code predated what Elvy calls “the IoT data gold rush” by several decades, and the results of their interaction were not intended by policymakers. In fact, the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) was intended (among many other things) to address consumer privacy concerns arising from data sales following several high-profile corporate bankruptcy cases. As Elvy describes in detail in the article, however, BAPCPA has many limitations, most notably its limitation to personally identifiable information (a dinosaur of a concept in an era where anonymized data can be readily re-identified)3 and deference to privacy policies.

Elvy proposes two principal solutions to the consumer-unfriendly landscape she describes. She notes that deferring to the concept of notice and choice does not adequately protect consumers; it gives consumers no control over their data while increasing the ability of companies to profit from that same data. Elvy also suggests bright-line rules limiting biometric data use in secured transactions and sale during bankruptcy because unlike other personal information like credit card numbers or addresses, fingerprints and eye scans cannot be changed.

Ultimately Elvy’s most valuable contribution is the bringing together of the various sources of law that govern transfer of personal information. American law is characteristically sector and subject matter specific. However, looking at the problem of personal information transfer in the IoT economy exclusively as a commercial lawyer, a consumer protection lawyer, or even a privacy lawyer is not sufficient. Policymakers, scholars, and stakeholders should periodically take a big picture approach to see how different areas of the law fit together and reinforce (or undermine) each other.

There is a deeply held American cultural tendency to hold individuals responsible for fine print in contracts. However, Elvy’s piece shows that when and how personal information is transferred between companies is largely not determined by contract law at all, but rather a combination of commercial law and sector-specific privacy law. Who has access to what type of data held by a company is a creature of commercial law, determined by the internal policies of that company and contractual relationships between debtor and creditor.

  1. Matt McFarland, Your Car’s Data May soon Be More Valuable than the Car itself, CNN-Tech (Feb. 7, 2017).
  2. U.C.C. § 9-203(b) cmt. 6, Am. Law Inst. & Unif. Law Comm’n (1977).
  3. Paul Ohm, Broken Promises of Privacy, Responding to the Surprising Failure of Anonymization, 57 UCLA L. Rev. 1701, 1703-05 (2010).
Cite as: Lauren Scholz, Paying to be the Product, JOTWELL (October 28, 2019) (reviewing Stacy-Ann Elvy, Commodifying Consumer Data in the Era of the Internet of Things, 59 B.C. L. Rev. 423 (2018)), https://contracts.jotwell.com/paying-to-be-the-product/.

Rectifying “Mistaken” Applications of the Mistake Doctrine to Personal Injury Releases

When one enters into a contractual agreement with another, expectations are created on both sides. Party A expects to receive something from Party B, and Party B expects to receive something in return from Party A. When courts become involved in contractual disputes, ensuring the fulfillment of these expectations is often one of their primary goals. The pursuit of this goal, however, must be balanced against other contracts principles, particularly those related to defenses against the enforceability of contracts. Professor Grace Giesel explores the balance between expectations and enforceability in her recent thought-provoking article, A New Look at Contract Mistake Doctrine and Personal Injury Releases.

Professor Giesel’s article begins with an informative discussion about the terms typically included in a personal injury release agreement. In particular, she notes that such agreements often require the injured party to relinquish “claims for all injuries relating to the incident whether those injuries are known or unknown” (P. 542) and whether those injuries have presently developed or will develop in the future. When those unknown injuries manifest themselves after the execution and payment of the release agreement, parties seek to invoke the mistake doctrine to challenge the enforceability of the agreement in their efforts to recover for additional related injuries. As Professor Giesel argues, injured parties will have a steep uphill battle to successfully make a case for mutual or unilateral mistake under such circumstances.

After discussing the rules related to contract mistake doctrine, Professor Giesel identifies several stumbling blocks that could impede injured parties’ ability to make a successful case for mutual mistake. First, as a threshold matter, there may not be a mistake of fact as the doctrine requires, but rather a mistaken prediction or speculation about the future. In addition, if a mistake of fact truly exists, it may not be shared by both the releasor and the releasee. Finally, the injured party may be deemed to bear the risk of the mistake either through conscious ignorance or contract allocation. Professor Giesel also identifies additional rules-based obstacles for those asserting a theory of unilateral mistake.

Despite the fact that in theory any one of these obstacles could successfully defeat a mutual or unilateral mistake claim, Professor Giesel asserts that courts struggle in their application of the doctrine in the context of personal injury releases. Their application is often more nuanced and less straightforward resulting in more successful mistake claims than perhaps would be expected “[i]f a court applies traditional contract doctrine.” (P. 553.) For example, some courts have drawn a distinction between an injured party’s mistaken belief regarding the existence of an injury as opposed to the consequences of an injury thereby permitting contract mistake doctrine to “apply to a mistake of diagnosis but not one of prognosis.” (P. 556.) Considering that such an analysis requires courts to wade into the “high weeds” of medical injuries, Professor Giesel expresses her and courts’ concerns that judges without medical training may be ill-equipped to consistently apply such a test, which could result in inconsistent holdings.

Professor Giesel also notes inconsistencies in courts’ holdings when they apply the unconscionability doctrine and traditional notions of contract interpretation to claims of mistaken personal injury releases. Competing policy concerns contribute to discrepancies in the courts’ analysis and decisions. As Professor Giesel notes:

Several policies are at play. On the one hand are the policies in favor of enforcing contracts freely entered into and the policy in favor of encouraging settlement. On the other side of the ledger, courts have spoken of the unknowability of the human body and thus its injuries, a desire that injured parties be compensated by the wrongdoer and not become a public burden, the noncommercial context, and a need to protect injured parties because of their weakness or lesser bargaining position. (P. 565.)

If one were to characterize the competing policies in terms of a “rules versus justice” dichotomy, it is safe to say that Professor Giesel would favor rules. After a thorough yet critical discussion of courts’ rationales to justify holdings that seemingly contradict traditional applications of contract doctrine, Professor Giesel concludes that “in order to protect the sanctity of contracts, contracts should be set aside only when a traditional doctrine demands that,” and for her, “[n]o policy put forward in support of providing more favorable treatment to personal injury releasors demands that preferential treatment.” (P. 572.)

In her skillful critique of arguments that plaintiffs and judges advance for setting aside a personal injury release, Professor Giesel makes a convincing case that more careful consideration should be afforded to the potential costs associated with misapplying traditional contract doctrine in this context. She worries that judicious application of the mistake doctrine in other situations may be compromised, and she cautions courts against contorting “traditional contract doctrine to reach a result desired.” (P. 575.)

Instead, Professor Giesel proposes that courts adopt “a release review doctrine,” similar to that applied when individuals agree to relinquish particular federal rights, to ascertain whether the injured party voluntarily and knowingly entered into the release agreement. In making their determination, courts could consider multiple factors such as “the education and experience of the releasor, whether the releasor had ample opportunity to review the release, whether the releasor enjoyed the assistance of counsel, whether the releasor was discouraged or encouraged to consult with counsel, and whether the release was clear or confusingly complex.” (P. 581.) According to Professor Giesel, adopting such a process-oriented approach could accomplish the dual goals of protecting the interests of both the releasor and the releasee while simultaneously preserving the sanctity of traditional contract doctrine on which parties and courts have traditionally relied. While it may be too soon to tell if courts will embrace Professor Giesel’s proposal and begin to employ a release review doctrine to analyze personal injury releases, doing so may lessen the number of inconsistent holdings that arguably result from courts’ “mistaken” application of the mistake doctrine to such contracts.

Cite as: Eboni Nelson, Rectifying “Mistaken” Applications of the Mistake Doctrine to Personal Injury Releases, JOTWELL (October 9, 2019) (reviewing Grace M. Giesel, A New Look at Contract Mistake Doctrine and Personal Injury Releases, 19 Nev. L.J. 535 (2018)), https://contracts.jotwell.com/rectifying-mistaken-applications-of-the-mistake-doctrine-to-personal-injury-releases/.

Are Sign-in-Wrap Agreements Unreadable?

Uri Benoliel & Shmuel I. Becher, The Duty to Read the Unreadable, 60 B.C. L. Rev. __ (forthcoming, 2019), available at SSRN.

Uri Benoliel and Shmuel I. Belcher answer the question posited in the title to this review with an absolute yes. In a well-written, concise, and quite persuasive article, the authors test the readability of 500 of the most popular websites’ “sign-in-wrap agreements,” which require online users to accept terms before using the website’s services. The authors employ two readability tests that measure the average length of sentences and the average number of syllables per word. After detailing the legitimacy of these tests, the authors report that the sign-in-wrap agreements are no more readable than academic journal articles and thus are “unreadable” by consumers. The article proceeds by providing a nice discussion of the nature of the two tests, the results, and the implications for contract law. The article adds important weight to other studies that conclude that Internet agreements challenge consumers. Although hardly revelatory, such empirical studies increase the pressure on lawmakers to revise the duty-to-read rule in the context of consumer standard-form contracts.

Benoliel and Becher recognize that long sentences and multi-syllabic words are only two of the many problems facing consumers who make Internet agreements. But they reason that paying attention to part of the problem provides a step in the right direction. They, therefore, suggest a series of regulatory moves and judicial responses. Perhaps most important, the authors argue that vendors drafting consumer Internet contracts should have a duty to draft agreements that receive a favorable readability score. The authors also sensibly call on courts to continue policing substantive terms and suggest that judges should relax the duty-to-read rule when consumers are faced with unreadable contracts. The authors are more tepid about another possible reform, requiring vendors to include a plain-language version of the agreement alongside the contract. They reason in part that two versions of the agreement can only create confusion over which version to read and which is binding.

Although Benoliel and Becher see the potential pitfalls of these and other solutions, they may have too readily discounted a few problems. Perhaps most concerning is the possibility that readability regulation may backfire by making consumer Internet contracts more likely enforceable without improving their substance. The authors recognize that sophisticated drafters may satisfy the readable tests with shorter sentences and words, but may substitute legalese that does not improve comprehension or may use deliberately flawed grammar. They also see the possibility that consumers will not read even more readable agreements because of their length, consumer over-optimism that nothing will go wrong, or the temptation to free ride on others reading. They respond in part that consumer behavior is not possible to predict, but that consumers may more likely read if they expect readable terms. However, if the authors’ prediction is mistaken, legalese remains a challenge, and consumers still don’t read, improving readability will only mean the loss of some consumer ammunition for overturning contentious terms.

Another quibble. Benoliel and Becher’s treatment of the role of Internet watchdog groups, which can evaluate and report on the fairness of Internet standard forms, is a bit confusing. At one point, the authors argue that market forces and reputational concerns likely will not help lead to more readable terms, but they do not consider whether watchdog groups can help change the equation. At an earlier point, however, the authors see the benefit of readable terms in reducing the transaction costs of watchdog group reporting, implicitly acknowledging the efficacy of such groups.

People should pay attention to The Duty to Read the Unreadable. The article not only substantiates the long-heard cries of the impossible nature of Internet standard forms, but does so with hard evidence. Further, the authors’ thoughtful evaluation of their proposed reforms underscores the difficult challenge of improving the plight of Internet consumers.

Cite as: Robert Hillman, Are Sign-in-Wrap Agreements Unreadable?, JOTWELL (September 9, 2019) (reviewing Uri Benoliel & Shmuel I. Becher, The Duty to Read the Unreadable, 60 B.C. L. Rev. __ (forthcoming, 2019), available at SSRN), https://contracts.jotwell.com/are-sign-in-wrap-agreements-unreadable/.

Fine Print Subservience

Meirav Furth-Matzkin & Roseanna Sommers, Consumer Psychology and the Problem of Fine Print Fraud, 72 Stan. L. Rev. __ (forthcoming 2020), available at SSRN.

Sellers entice consumers to make purchases by advertising many lovely benefits of their products. It is quite common, however, to then qualify and narrow these marketing promises in the fine print terms attached to the transactions. What if sellers outright deceive consumers—by making loud promises that they surreptitiously negate or contradict in the fine print? What if, say, a phone carrier runs an ad for an “unlimited” data plan which, under the terms of service, is actually strictly limited?

In a surprising article, Meirav Furth-Matzkin and Roseanna Sommers (academic fellows at the University of Chicago Law School) expose the cognitive impact of this tension between explicit promises and fine print. Consumers, their experiments show, may feel committed to the fine print, even when it strips away explicit promises made to them. Laypeople are “intuitive formalists”: not only do they (incorrectly) believe that such conflicting fine print is binding, they also think this is how things should be! They blame themselves for not reading and knowing what’s in the boilerplate, and they are unlikely to complain or to hold the deceiving business accountable.

Lawyers know that consumer protection law does not permit deception. Material promises and representations made before the contract become part of it, and efforts to negate them in the fine print are ineffective, and rightly so. Luring consumers with phantom perks that the business has no intent to confer is fraud. But consumers don’t know what lawyers know. How do they react in the face of fine print terms that conflict with their expectations—those formed by the business’s explicit promises?

In prior work, Tess Wilkinson-Ryan showed that obligations appearing in the fine print are viewed by people as morally and legally legitimate even when they are not. But what if they directly conflict with an explicit assurance? In a set of experiments, a disturbing effect is drawn out: people feel subservient to the fine print. In one scenario, subjects were asked about a car loan guaranteed to be “without any fees” but which in fact came with Terms and Conditions requiring a $3 fee with each payment (totaling, overall, hundreds of dollars). The scenario was presented to lay people (M-Turk) as well as to Harvard/Yale legally trained folks. The two populations agreed that in light of the advertised promise it would be unfair to hold to a consumer bound to pay the fees. But they differed in two important ways. The legal elite correctly doubted whether the consumer “consented” to the fees, and tended to think courts are unlikely enforce them. The larger population reported a glummer attitude, saying that the consumer consented and that courts would enforce the boilerplate.

People do recognize fraud when they see it; and yet, the presence of fine print alters their judgment. In a separate experiment, respondents were given the same “no fees” express promise and were subsequently (and fraudulently) charged the fees. But one group did not receive any fine print disclosure of the fees (“fraud only” treatment), whereas the other group did receive an unread disclosure (“fraud and fine print” treatment). In the “fraud only” condition, the vast majority of respondents (85%) condemned the business for its fraudulent practice and wanted to take some kind of action. In the “fraud and fine print” condition, by contrast, most people (73%) surrendered and yielded to the fee. Given a disclosure—albeit a useless one—they no longer thought that they were wronged, and did not even intend to post a negative review of the business’s deceitful tactics.

The enormous power that fine print exerts on people’s perceptions of their obligation was further demonstrated when comparing “fraud and fine print” to a different treatment in which there is no fraud, only fine print. For one group of respondents, the disclosed fees conflicted with the advertised terms. For another group, there was no advertisement and thus no conflict—they were simply charged fees that were stipulated in the fine print. One would expect consumers to be more upset when the fine print terms conflict with an explicit promise. But no! misrepresentation or not, in both cases the existence of fine print leads people to feel equally beholden to the obligations buried in it.

These results reinforce the sobering insight of prior work: consumer protection doctrines are weakened by people’s cognitive response to fine print. Forget lawsuits, even the modest hope that consumers would denounce fraud by posting negative reviews may be over-estimated. The psychology of fine print seems to join the economics of litigation as barriers to private actions by consumers.

The article correctly recognizes that an entirely different regulatory action—relying on public rather than private enforcement—may be needed to address deception. But, like many other studies of consumer trouble, this article too does not resist the allure of the disclosure panacea. Could the easiest of all regulations—the one-size-fits-all mandated disclosure—solve the problem of consumers’ intuitive formalism? Could consumers be taught that fine print does not absolve fraud? The authors want to test this possibility, and indeed find that telling their participants about the law—about the rule that small terms cannot contradict the explicit statements made before the contract—has a modest effect in counteracting the psychological effect of fine print. They conclude that “education” about the law could be effective. They acknowledge that the effect they measure in the lab may not apply in the real-world, where consumers are overwhelmed by disclosures. Still, I am left wondering: why design a disclosure treatment known (and candidly admitted in the ensuing discussion) to be externally ineffective? Why dilute the agonizing lesson of the study with a gesture towards useless disclosure solutions?

Puzzled as I may be about ending such an excellent article with the superfluous notion of consumers’ “education,” my appreciation for the authors’ primary insight remain unshaken. I now realize the deeper futility of the pervasive hopes that consumers could read the fine print and rebel against its deceptive portions.

Cite as: Omri Ben-Shahar, Fine Print Subservience, JOTWELL (July 30, 2019) (reviewing Meirav Furth-Matzkin & Roseanna Sommers, Consumer Psychology and the Problem of Fine Print Fraud, 72 Stan. L. Rev. __ (forthcoming 2020), available at SSRN), https://contracts.jotwell.com/fine-print-subservience/.

What is the Moral Problem with Private Tyranny? Is Contract to Blame?

Both of the first two chapters of this new edited volume–The Contractualisation of Labour Law by John Gardner and Is the Contract of Employment Illiberal? by Hugh Collins—grapple with the structure of employment relationships and how they relate to their legal form. (We are lucky to have had another important recent treatment of this question by Elizabeth Anderson in Private Government (2017).)

John Gardner does not ask precisely the question of my title, but he does offer an answer to it. Gardner is primarily critical of a trend toward what he sees as the contractualization of labour, which he regards of a more general trend toward the contractualization of relationships generally. Tracing our obligations back to contract, he argues, tends to lead us to think that our contracts are the reason we owe other people what we owe them. We also tend to look at our contracts as the fountains of obligation, rather than the nature of our relationships with other people.

Gardner does not resist—or advocate for—any particular legal change. His is mostly a cultural lament. His target is the contractual model of employment, which is taken to justify authoritarianism at work and the idea that “work is there to pay for the life of the worker without being part of that life.” We tend now, he argues, to lose sight of how one’s role as a worker and her employment relationship can play a meaningful part in an employee’s life.

Gardner comes at the problem of authoritarianism at work indirectly. He suggests that the emphasis on contract and its content-independent reasons for employer authority tend to distract from the matter of whether authority is well-used, which turn on the content-dependent reasons for an employee’s substantive obligations. Neither the reasons relating to the employee’s own life plan, such as a desire to put her talents to good use, nor the reasons relating to the employer’s purposes, such as the need to get some task done, are relevant to the employee’s obligations under contract. Those derive just from the fact that she is being paid; so as long as she is paid, anything can be asked of her. The employer has no duty to use his authority reasonably, at least in a popular imagination that has fully contractualized employment (Gardner, Pp. 43-44.) The problem with the resulting private tyranny in Gardner’s picture is that it leaves employees lives empty. Most of their day is spent earning compensation; work just makes it possible to live and at best to pursue life projects in the few remaining hours outside work. The charge is subtle, but yes–contract is to blame.

Hugh Collins comes at the question of private tyranny more directly. He begins with the observation that “[t]he contract of employment embraces an authoritarian structure that appears to be at odds with the commitment in liberal societies to values such as liberty, equal respect, and respect for privacy.” (Collins, P. 48.) Collins concludes by the end that there is indeed “an inherent tension between some liberal values and the institution of the contract of employment that can only be resolved by labour law adopting a particular, worker-protective, legal framework for employment relations.” (Collins, P. 51.)

Collins is not concerned that workers submit to their employers on the latter’s terms. He finds more problematic the subordination of employees to employers on a daily basis as an instrument for the latter’s ends. It is not just that the employer has coercive power by way of threatening termination; by virtue of their contract, the employer exercises practical authority over the employee. Finally, the open-ended nature of the employee’s obligations gives the employer a kind of lesser “prerogative power,” or wide managerial discretion.

Collins suggests that one problem for liberalism arises from the fact that civil liberties, like the right to speech, become subject to employer permission. There is also a contingent but serious risk that managerial discretion will be dominating. Finally, the different levels of esteem associated with the status of employer and employee, respectively, conflict with a principle of equal respect. Collins concludes that we need restrictions on the content of employees’ obligations, restrictions on employers’ restrictions of civil liberties, and restrictions on discipline and dismissal. Collins’ account of the conflict between liberalism and modern employment is more direct than Gardner’s but he similarly concludes that the employment contract as we know it is illiberal. However, he is more sanguine about the power of legal reform to redeem it. While Gardner sees the problem as an ideological one that doctrinal changes cannot undo, Collins suggest that concrete limits on employers can make the employment contract just.

First and foremost, these essays are an essential read because they grapple deeply with a pervasive moral challenge to modern society. If we cannot justify the private tyranny that is modern employment for most Americans (and most people generally—note both Gardner and Collins are British), one of the basic structures that most concretely shapes our everyday lives is unjust. It is hard to know where to start with such a problem. Gardner’s analysis takes as its object the individual relationship of employment and what it means for individual employees. It is a depressing analysis. Collins studies features of employment from a more social or systemic perspective. His analysis is not quite as depressing but it is not happy either. Between the two of them, they capture a lot about what is wrong with private tyranny. This reader is sympathetic to some of Collin’s prescriptions but is persuaded by Gardner that they would not sufficiently temper private tyranny at work, or ensure that work is more than just a means to live. We might hope, though, that even if most employees cannot find meaning in their relationships with their employers, they might still find satisfaction in other dimensions of employment, including relationships with co-workers, customers and the actual work, whether manual or intellectual. We might need to hear next from psychologists, or just more people, about whether we are capable of separating out the contractual and noncontractual dimensions of work life in this way.

Additi Bagchi, What is the Moral Problem with Private Tyranny? Is Contract to Blame?, JOTWELL (October 1st, 2019)(reviewing John Gardner, The Contractualisation of Labour Law, in Philosophical Foundations of Labour Law (Collins et al. eds., Oxford U. Press, 2019); Hugh Collins, Is the Contract of Employment Illiberal?, in Philosophical Foundations of Labour Law (Collins et al. eds., Oxford U. Press, 2019)), https://contracts.jotwell.com/?p=789&preview=true.