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Income Sharing Arrangements and Coding Bootcamps: Boom or Bust for the Blue Collar Breadwinner?

Jonathan F. Harris, Unconscionability in Contracting for Worker Training, 72 Ala. L. Rev. __ (forthcoming, 2021), available at SSRN.

During the 2020 coronavirus pandemic, many firms turned to remote and computer assisted arrangements to get work done remotely and safely. During the summer, however, jobless claims rose as the economy took a downturn. These economic pressures have driven many workers to seek job training or even re-training to protect themselves from the worst of the recession. Out of desperation, some workers are turning to code academies or bootcamps to learn new skills, while existing employers have in some instances started charging workers for the cost of new training.

In his forthcoming article, Unconscionability in Contracting for Worker Training, Jonathan Harris explores the contractual issues that arise when workers or job applicants are asked to pay for their training outside of traditional educational structures. This could arise through a training repayment agreement (TRA), which requires an existing employee to repay the employer a fixed sum expended on training if the worker quits or is fired during a set period of time. This Jot, however, will focus on the other setting in which these non-traditional training arrangements are arising, and which Harris discusses at some length in the second part of his article. These are the so-called Income Sharing Agreements (ISAs), which for-profit code academies use. ISAs are contracts that require the trainee to repay a set percentage of future income in exchange for the tuition that enables them to attend a computer coding academy or bootcamp.

While at first glance this may seem like an positive career opportunity to many blue collar or displaced service industry workers, these arrangements have the potential to become exploitative. Harris’s article provides insights into these novel arrangements and he suggests using the lens of unconscionability to analyze both TRAs and ISAs.

Delving deeper into the issue, Harris notes that many coding programs last between three months and one year, but they do not offer a formal degree in computer science. Some target lower-income populations or youth from communities of color. These coding programs may bill themselves as “free upfront,” but as they take a percentage of future income, that may be misleading to jobseekers. Harris notes that the terms of the ISAs vary, but some require between six and seventeen percent of income for a period of three to ten years of employment.

Coding bootcamps largely aim their appeal to blue collar and service workers who look to them as a path toward a well-paying job, income stability, and upward mobility. What these trainees might find, however, is not always what is promised. Because these code academies are new, and they are for profit businesses, quality may also vary widely. The financing structure may be opaque and misleading. Harris provides one example of a bootcamp that takes future earnings of $30,600 that would typically cost a few thousand if paid upfront. While some trainees may receive excellent hands on training in coding, other students may find themselves watching publicly available videos on YouTube and be asked to cobble together their own learning. Still others may find that employers want degrees, not bootcamps, and that they are saddled with high debts. The concern is that these kinds of debts set up the modern equivalent of the debt-peonage system.

This is where Jonathan Harris’s unconscionability analysis comes into play. While ISAs are yet too new for analysis from courts, Harris describes some key factors to finding an ISA unconscionable, for example: How large is the repayment amount compared to the trainee’s future salary; whether the income threshold for repayment is relatively high; whether the debt can be discharged in bankruptcy; and whether provisions exist for disability or other situations the trainee may face. These are all elements that Harris correctly suggests should be part of any unconscionability analysis of ISAs.

But what of student loan debt, which bears a similar resemblance in that it puts the burden of training all on the student? Harris notes that while student loan debt may be an ongoing problem, at least it is quantifiable, whereas with ISAs, the amount owed is often opaque and it makes it very difficult for the trainee to understand how much their program is worth to them in future earnings and what they will eventually owe. Finally, the article ends with Harris discussing a tripartite solution (workers/unions, employers, and government) working together to put training programs in place that will assist not only the workers and employers who need skills, but also make sure that society benefits from that training and those skills.

Ultimately, in Contracting for Worker Training, Jonathan Harris shines a light on novel TRA and ISA contracts. ISA contracts could help some workers upgrade their skills. Unfortunately, as Harris notes, the ISAs could also take advantage of anxious jobseekers. Harris’s article is an illuminating and worthwhile read for those interested in the future of work and a novel application of the unconscionability doctrine.

Cite as: Miriam Cherry, Income Sharing Arrangements and Coding Bootcamps: Boom or Bust for the Blue Collar Breadwinner?, JOTWELL (November 30, 2020) (reviewing Jonathan F. Harris, Unconscionability in Contracting for Worker Training, 72 Ala. L. Rev. __ (forthcoming, 2021), available at SSRN), https://contracts.jotwell.com/income-sharing-arrangements-and-coding-bootcamps-boom-or-bust-for-the-blue-collar-breadwinner/.

Contracts in the Time of COVID-19

David A. Hoffman and Cathy Hwang, The Social Cost of Contract, __ Columbia L. Rev. __ (forthcoming), available at SSRN.

Almost ninety years ago, Morris Cohen taught us that the primary role of contract law is to place the enforcement mechanism of the state at the service of one party against the other (Cohen 1933, Pp. 585–86; see also Zamir 1997, Pp. 1777–78). Since enforcement of contracts entails the exercise of governmental powers and the use of public resources, contract law (like the rest of private law) is part of public law. This means that whatever the role played by freedom of contract, it cannot be the only principle that motivates the law. Contract law inevitably reflects public concerns, as well. Most obviously, it follows that whenever a contract creates substantial negative externalities—that is, whenever it adversely affects the well-being of other people—there are prima-facie grounds for curtailing freedom of contract (Zamir & Ayres 2020, Sec. 1.A). Examples of doctrines that serve this goal include the rules concerning illegal contracts, contracts against public policy, and various other mandatory rules.

As in past epidemics, COVID-19 creates situations in which the performance of contracts might adversely affect the public at large. These include contracts pertaining to events with many participants—such as weddings, funerals, and conferences—which may turn into super-spreading events. It also includes more mundane contracts, such as between universities and students, since attending ordinary classes may also result in spreading the disease. Performing such contracts may or may not be forbidden by law. Either way, one of the parties (typically, but not invariably, the customer) may wish to back out of it—in which case a legal dispute may arise. How should such disputes be resolved? What should we advise the parties to do in such circumstances?1 These questions lie at the heart of David Hoffman’s and Cathy Hwang’s highly recommended article, The Social Cost of Contract.

The article consists of three parts. Part I is more theoretical. It argues that since contracts often entail social costs, the public is involved in contracts, and bargaining is carried out in the shadow of the law. Specifically, the authors highlight three mechanisms by which the law intervenes in contractual relationships. First, there are transactions (such as the sale of illegal substances) that simply cannot be performed through legally enforceable contracts. Second, some transactions require the approval of regulators (such as mergers that require the approval of antitrust authorities)—which often results in actual negotiations between the parties and the regulator. Third, when contractual disputes reach the courts, they may also take into account the negative externalities of contracts as they interpret or reform them, decide about contractual defenses, or design remedies for breach. Even when courts do not make explicit reference to the doctrine of public policy, public concerns inform the courts’ decisions in such cases. As the authors conclude, the public always has the last word—through interpretation and enforcement of contracts in court.

I would extend this insightful analysis even further. According to Morris Cohen’s argument, any enforcement of a contract, whether it entails externalities or not, is a public matter. If so, the state must ask itself whether to use its coercive powers and spend its limited resources to enforce contracts, even when no externalities are involved. In fact, some of the examples discussed in the article—such as the unenforceability of liquidated damages in tenancies (P. 14) and the rules about mutual mistake (P. 17)—are not primarily about externalities. Moreover, the public is involved in any contractual issue not only through mandatory rules that render contractual obligations unenforceable, or through judicial reformation of contracts, but also in establishing default rules, imposing pre-contractual disclosure duties, and so forth.

It should also be emphasized, as the authors do, that the three mechanisms they describe are only examples. There are additional mechanisms that curtail freedom of contract ex ante (including judicial precedents and regulatory guidelines); regulatory agencies are involved not only in the design of specific contracts, but also in ex ante lawmaking and ex post enforcement; all institutions use a mixture of standards and rules, and employ civil, administrative and even criminal sanctions to handle contractual externalities; and so forth.

Part II of the article contains a nuanced analysis of various doctrines and precedents by which courts reform contracts that give rise to significant negative externalities. These include excuses for non-performance, creative interpretation, reformation, and more. Collectively, they are described as “an anti-canon: a set of disfavored and odd cases that result from extraordinary facts” (P. 20). An interesting aspect of the case law (which lies beyond the scope of the present article, but is worth exploring), is that courts often prefer to use circumventive means (such as interpretation) to reach a sensible outcome, rather than explicitly rely on doctrines such as impossibility or public policy. Such rhetoric enables courts to play down their active role in contractual matters. This inclination is closely related to broader issues of the tension between what Robert Hillman has called “contract lore,” and the realities of contracts and contract law (Hillman 2002; 2020).

The practical importance of the doctrinal analysis of Part II is highlighted in Part III. Here, the authors persuasively argue that, rather than follow simplistic advice based on the binding force of contracts, contracting parties should realize that the outcomes of litigation in disputes arising from the COVID-19 pandemic—especially when contracts involve considerable externalities—are far from certain. Courts can use a multiplicity of doctrines to arrive at different results, depending on variables such as “the parties’ relative fault, the actions and signaling by public health authorities, and the specificity of contract terms about risks” (P. 27). It follows, that parties “should be more willing to split the difference in COVID-19 contract cases than they would ordinarily be” (P. 34). Interestingly, similar advice—namely, to negotiate in good faith with a view to adapting contracts to the changed circumstances of the pandemic—has recently been given to contracting parties by the Israeli Inter-Ministerial Team for the Examination of the Effect of the Coronavirus on Contracts (July 7, 2020, in Hebrew).

Hopefully, the challenges to contract law posed by COVID-19 will soon be a thing of the past. But Hoffman’s and Hwang’s analysis will remain relevant and important in many other contexts.

  1. Note that these questions focus on the relationships between the parties. A different set of questions arises when people who are adversely affected by contracts wish to impose liability on the contracting parties (see, e.g., Parella 2020).
Cite as: Eyal Zamir, Contracts in the Time of COVID-19, JOTWELL (November 10, 2020) (reviewing David A. Hoffman and Cathy Hwang, The Social Cost of Contract, __ Columbia L. Rev. __ (forthcoming), available at SSRN), https://contracts.jotwell.com/contracts-in-the-time-of-covid-19/.

Heeding the Call of Those Harmed by Contractual Incapacity

Sean M. Scott, Contractual Incapacity and the Americans with Disabilities Act, 124 Dick. L. Rev. 253 (2020).

Inherent in contractual defenses such as infancy and mental incapacity is the goal of protection. In the case of infancy, contract law seeks to protect underage minors from themselves and from opportunistic adults who may attempt to take advantage of their lack of experience and judgment when entering into contracts. Similar protection goals underlie the contractual defense of mental incapacity whereby individuals with a mental disability or illness may avoid a contract due to their inability to understand the transaction or act reasonably with regards to it. The defense is intended to benefit those with mental disabilities. However, as currently conceived, it may actually do more harm than good. Utilizing the Americans with Disabilities Act (“ADA”) and the Disability Rights Movement (“DRM”) as her guides, Dean Sean Scott explores this important issue in her recent thought-provoking article, Contractual Incapacity and the Americans with Disabilities Act.

Dean Scott begins her article with a discussion of Renchard v. Prince William Marine Sales, Inc.1 wherein a buyer of a yacht sought to avoid the purchase agreement and other contracts with the seller due to his alleged physical and mental disabilities. Although the buyer unsuccessfully attempted to amend his compliant to allege discrimination under the ADA, Dean Scott hypothesizes that sellers may impose heightened scrutiny and screening and avoid making contracts with certain individuals based on their fear of contract rescission or avoidance due to courts’ current application of the mental incapacity doctrine. In light of this possibility and the conflicting language and principles associated with contractual incapacity as compared to the ADA and the DRM, she argues “that the mental incapacity doctrine should yield to the DRM and the ADA” (P. 257) and that the doctrine “should be limited to people with mental disabilities who were subject to a plenary guardianship when they entered into the contract at issue.” (P. 255.)

In developing her thesis, Dean Scott engages in a thorough and interesting discussion of the historical evolution of the mental incapacity doctrine as well as the various standards for measuring incapacity. She explains how the doctrine has been influenced by the competing interests of protecting freedom of contract, certainty, and expectancy on one hand and the interests of individuals with a mental disability on the other. After a discussion of discrimination claims under Title III of the ADA, Dean Scott skillfully and convincingly makes the case that current conceptions of mental incapacity as a contractual defense fail to adequately protect either interest and, thus, should be amended to afford greater protection for both.

Central to Dean Scott’s argument is her contention that “[t]he mental incapacity doctrine supports the misperception that simply having a mental disability justifies restrictions on one’s rights and liberties, including the ability to enter into a binding contract.” (P. 269.) She argues that such misperceptions are rooted in, and reinforce, stereotypes and gender norms that are harmful to the Disability Rights Movement and invite “the very kind of judgment the ADA and disability rights advocates are trying to eliminate.” (P. 279.) She is also concerned that incapacity claims can lead to “disability drift” (P. 274) whereby a physical disability such as deafness is used to evidence a mental disability. According to Dean Scott, parties’ and courts’ reliance on such evidence to establish incapacity is predicated on demeaning myths and stereotypes that impede the DRM’s efforts to eliminate the stigma, discrimination, and other negative consequences that individuals with disabilities often experience.

According to the article, the mental incapacity doctrine runs counter to the values of the ADA and DRM because it calls for lay people rather than medical experts to make judgements and determinations about whether someone has a mental disability, which they are not qualified to do. Without a previous adjudication of incompetence in some other proceeding, Dean Scott fears that jurists and jurors will base such determinations on inaccurate assumptions, incorrect information, and misconceptions about mental illness and disability. This current contractual defense landscape harms the DRM and hinders its progress, which is why Dean Scott proposes restricting the availability of the mental incapacity defense only to “those who have been adjudicated incompetent and were subject to a plenary guardianship at the time they entered into the contract.” (P. 268.)

At first glance, Dean Scott’s proposal may seem to thwart rather than advance the goal of protecting individuals with mental disabilities. People with mental illnesses or disabilities at the time of contracting who do not meet her restrictive criteria would be unable to rely on the incapacity defense to avoid harmful or unfair contracts. Dean Scott acknowledges this and other potential consequences that could result from imposing a bright line rule such as limiting judicial discretion and pricing individuals out of protection due to the costs associated with establishing and managing a guardianship. However, she thoughtfully addresses these concerns and includes discussion of other contract defenses such as undue influence and unconscionability that may offer protections for individuals with mental disabilities who enter into unjust or abusive contracts. In so doing, she strengthens her argument for reforming the mental incapacity doctrine, particularly as it relates to the goal of encouraging contract formation by promoting certainty in contract enforcement.

Dean Scott suggests that current conceptions of the incapacity defense serve as a disincentive for parties to contract with persons with mental disabilities. She argues that “[a]ctual knowledge that the potential customer was not subject to a guardianship would remove incapacity as a disincentive to engage in the transaction, which would be a desirable result.” (P. 306.) Increasing parties’ certainty in enforcement would encourage them to enter into more contracts with individuals with disabilities, which would advance the ADA’s and the DRM’s important goal of more fully integrating people with mental illnesses and disabilities into society.

As Dean Scott recognizes, the ability and freedom to contract is vital for such societal integration. Entering into contracts allows individuals to obtain the goods and services they need to survive and thrive in society. It also instills in them and demonstrates to others their dignity, independence, respect, and recognition. Now, more than ever, it is imperative that our laws and practices reflect and encourage such values for everyone, especially for those who are members of marginalized communities. If they fail to do so and, thus, perpetuate harms, such laws and practices should be amended to help mitigate those harms. I greatly appreciate Dean Scott’s recognition of the need for such reforms in the context of contractual incapacity, and I applaud her for penning this excellent article advocating on behalf of individuals with mental disabilities and urging the law to “hear their demands, consider their perspectives, honor their values, and construct a rule accordingly.” (P. 318.) Hopefully, we all will heed their call.

  1. 87 F.Supp.3d 271 (D.D.C. 2015).
Cite as: Eboni Nelson, Heeding the Call of Those Harmed by Contractual Incapacity, JOTWELL (October 8, 2020) (reviewing Sean M. Scott, Contractual Incapacity and the Americans with Disabilities Act, 124 Dick. L. Rev. 253 (2020)), https://contracts.jotwell.com/heeding-the-call-of-those-harmed-by-contractual-incapacity/.

Business Strategies in the Computer Age

Shmuel I. Becher & Sarah Dadush, Relationship as Product: Transacting in the Age of Loneliness, __ U. Ill. L. Rev. __ (forthcoming, 2021), available at SSRN.

Articles on contract law contribute to our understanding of the subject in many different ways. Professors Becher and Dadush’s article, Relationship as Product: Transacting in the Age of Loneliness is a must read, not because it resolves a legal issue or presents a novel way of looking at a problem, but because it raises a red flag about business practices with consumers that requires attention. Becher and Dadush argue that businesses have new methods of taking advantage of consumers in contracts brought about in part by technological advances and the concomitant social isolation and loneliness of people in our 21st century society. The authors write that “[B]usinesses increasingly utilize big data, sophisticated technology, and psychological vulnerabilities to design and tailor highly personalized and emotionally charged messages. Such messages are meant to signal, and instill in consumers, a sense of mutuality, care, compassion, intimacy, love, and affection.” (P. 4.) And more: “The loneliness epidemic makes it easy for firms to succeed in offering deep relationships to consumers—and to profit from doing so.” (P. 25-26.)

According to Becher and Dadush, businesses seek to create caring social relationships with consumers, at least superficially, to benefit their bottom line. The authors call this strategy “relationship as product.” The authors worry that this businesses strategy exploits consumers, among other things, by lulling them into making emotional instead of rational decisions about their contracts. This culminates in consumers making unwanted purchases of goods and services that “undermine social trust and decrease overall well-being.” (P. 7.) Moreover, consumers resistant to “relationship as product” do not go unaffected: “Relationship as product may thus result in higher prices for goods and services for all consumers, not just those who fall for love promises.” (P. 44.)

The authors set forth numerous examples of “relationship as product.” For example,

A company sends an e-mail titled “A Love Note from Everyday Oil,” greeting its customers with “Hello to this beautiful community of people we love!” A telecom company greets a customer returning from a trip overseas with an unsolicited text message that simply says “Welcome home! We hope you had a safe trip.” An oil and gas company e-mails a customer, congratulating him on being “a great customer” and informing him that “we thought we’d return the favor” by offering a few cents discount on fuel. (P. 5.)

Relationship as Product: Transacting in the Age of Loneliness is well-documented and contains numerous insights, including a helpful discussion of the reasons for 21st Century isolation (which includes the amount of time we spend on our devices) and the manner in which businesses may exploit consumer cognitive biases. The article also usefully sets forth and develops the various stages of the business and consumer relationship that helps establish “relationship as product.”

Simply put, Stage 1 includes B2C communications and interactions up to the point at which a consumer decides to transact. Stage 2 encompasses the communications and interactions during the transaction itself. Stages 3 and 4 relate to interactions and communications between the parties once the transaction is completed . . . . (P. 16.)

Becher and Dadush recognize the need for more work that documents the effect on consumers of the business strategies they identify.1 In fact, the authors acknowledge that some of these business practices actually may benefit consumers. Consider another example reported by the authors:

In case you missed tomorrow’s local weather memo for the NY/Philadelphia area, it’s going to rain . . . and quite a lot we hear. This could easily put a damper on your travel plans. Wear your galoshes, remember your umbrella, and be sure to give yourself extra time getting to and from the airport tomorrow, August 7. If your travel plans are flexible, you may want to consider flying on a different day or connecting in a different city. The good news is that we’ll waive all the change fees. So, visit the United app or united.com to check out your options instead of holding for one of our busy call centers. Thank you for flying with us! (P. 21.)

Although Becher and Dadush seem troubled by this communication, it does not strike me as the kind of opportunism that cries out for regulation.2

Another topical example of “relationship as product” identified by the authors is firms’ response to the Covid 19 epidemic.

Consider, for instance, the many firms that cancelled contracts with their consumers in the wake of Covid-19. Often, these firms asked consumers to accept a credit or a voucher rather than a refund, or to wait patiently for months to be refunded. Consumers who believe they share an emotional connection with these firms may be more tolerant of such requests and may not protest them. (P. 37.)

A good argument can be made, however, that these firms are suggesting a valid compromise of a problem currently vexing contract law, namely how to allocate the risk of the pandemic that has disrupted countless contracts across the globe.

Even assuming such communications are problematic, as Becher and Dadush suggest,3 lawmakers would face lots of additional challenges acknowledged by the authors.4 Isolating the potential problem does not mean there is a ready solution. The authors suggest reviewing whether contract law should relax the age-old distinction between “puffing” and promise or warranty.5 In addition, they worry about whether the “reasonable consumer” standard should be applied to this problem. The authors do not hide their sympathy for change here.6 But line drawing will be difficult. Should the already shifty car sales person be sanctioned for trying to establish a friendly rapport with the potential buyer? For that matter, what about the university president or dean meeting with potential donors?

Becher and Dadush sum up their concerns thusly: “By their nature, firms’ promises of love, intimacy and friendship are impossible to keep. As such, they are false.” (P. 46.) And further: “The law neglects to police this reality properly. It adopts a narrow and outdated view of B2C relationships and consumer behavior . . . . the law tends to assume that consumers can maximize their welfare and their well-being.” (P. 56.) Whether or not the reader agrees with their concerns and suggestions for reform, Relationship as Product: Transacting in the Age of Loneliness is food for thought that should not be ignored.

  1. “This Article sounds the call for empirical and theoretical research into the relationship as product phenomenon.” (P. 56.)
  2. Another example, “[f]irms often e-mail consumers with ‘friendly’ warnings that their cart is about to expire.” My reaction to such an e-mail is to want to thank the sender for the reminder. (P. 11.)
  3. The authors write that “[t]he law has an important role in protecting consumers from unethical practices by firms.” (P. 38.) Further, they seek to apply Section 45(a) of the Federal Trade Commission Act, 15 U.S.C. § 45(a) (2006), which “provides the Federal Trade Commission (FTC) with a mandate to act against ‘unfair or deceptive acts or practices in or affecting commerce.’” (P. 38 n. 199.)
  4. “[S]ketching a new regulatory framework to police the grey line between legitimate and illegitimate emotional promises is no simple task.” (P. 39.)
  5. “One main strategy for drawing this line is to ask whether the claims at issue are ‘capable of measurement’ or otherwise verifiable. The more verifiable, the less likely to be treated as puffery. We join others in criticizing this methodology and in calling for a different approach.” (P. 42.)
  6. “[T]he law should acknowledge that consumers cannot always remain rational. In fact, firms often push consumers into irrationality.” (P. 39.) And further, “[f]irms should be restricted in their ability to humanize the B2C relationship in ways that manipulate consumers.” (P. 39.) Finally, “the law is under-equipped to police the subjective and emotionally qualitative appeal—and harm—of relationship as product.” (P. 44.)
Cite as: Robert Hillman, Business Strategies in the Computer Age, JOTWELL (September 7, 2020) (reviewing Shmuel I. Becher & Sarah Dadush, Relationship as Product: Transacting in the Age of Loneliness, __ U. Ill. L. Rev. __ (forthcoming, 2021), available at SSRN), https://contracts.jotwell.com/business-strategies-in-the-computer-age/.

A Crisis of Faith in (the Efficiency of) Expectation Damages

Theresa Arnold, Amanda Dixon, Madison Whalen, & Mitu Gulati, The Myth of Optimal Expectation Damages, __ Marquette L. Rev. __ (forthcoming), available at SSRN.

Everyone knows that the expectation measure is the standard, default measure of damages for a bargain contract, and for the last few decades most scholars have regarded the expectation measure as backed by weighty, straightforward justifications grounded on economic efficiency. But there are several reasons to doubt both of these general propositions, as the authors of The Myth of Optimal Expectation Damages nicely suggest and begin to demonstrate using empirical data from bond markets.

As doctrinal background, the expectation measure is not in fact as widely established as the default damages measure in contract law as many teachers of Contracts suppose. It’s true that it’s one standard measure, but the law uses other defaults in several important and often neglected contexts. For example, in many states, buyers of real estate don’t get expectation damages for breach by the seller unless the breach is in bad faith; instead, the buyer is often limited to reliance damages (and often quite a limited subset of reliance damages). Similarly, doctrines that are commonly regarded as non-remedial, like doctrines of mistake, increasingly lead to remedies other than expectation damages.

As economic background, the standard instrumental justification for expectation damages is, on reflection, surprisingly circular. Expectation damages are treated as necessary to require the promisor to take appropriate precautions against breach, but at bottom “appropriate” ordinarily ends up resolving to some definition that assumes the efficiency of the expectation measure. And as a purportedly comprehensive refutation of remedial measures greater than expectation damages—such as disgorgement or specific performance—the simple version of the “theory of efficient breach” still often taught uncritically by Contracts professors has proven to be an analytical disaster.

The Myth of Optimal Expectation Damages makes a specific, important empirical contribution to this debate. As the authors note, empirical contributions here are difficult for several reasons. For example, some remedial rules are mandatory rules, like those that prevent stipulated “penalties” in excess of expectation damages, so the absence of such provisions from contracts isn’t evidence that parties prefer expectation damages. To get around this and other problems, the article focuses on terms that are not formally remedial but that serve an economically identical role: alternative performance terms in bond contracts that specify costs for an issuer who prepays debt in advance of the schedule otherwise contemplated in the bond. Of course, this is just one domain—though, as the authors point out, “a multi-trillion dollar one”—but the authors’ data is important and is consistent with skepticism of a single, efficient measure of contract damages.

The authors’ central empirical findings are clear: virtually none of the contracts they studied call for prepayment penalties that would implement expectation damages; in fact, a range of measures is used; and parties often seek what would formally be labeled “supracompensatory” damages. This finding adds to other literature showing that sophisticated parties often choose measures of damages other than the expectation measure, which undercuts one type of efficiency-based analysis in contract law: that default rules should do what theoreticians predict rational parties would want them to do.

The authors also interviewed transactional lawyers who work with debt agreements and found that these lawyers don’t appear to think in terms that orthodox contract-law theory would suggest. Instead, they adopt other perspectives, including one that the authors interestingly characterize as associated more with joint ventures than with simple contracts: borrowers may ask for “supracompensatory” damages from issuers because they want to share in the issuer’s upside in the event an issuer finds itself with the ability to prepay debt. (After all, this is only fair: borrowers face significant downside in the event an issuer is unable to pay on the original schedule.)

A coda to the article (which, admittedly as a theoretician myself, I wish were longer!) raises the notion that simple analyses of allocative efficiency may not be an appropriate basis after all for a justification of expectation damages. The authors propose one alternative (that the default availability of expectation damages is an information-forcing rule—a penalty default that parties don’t want and ought to bargain around), but others are important to consider as well. The most obvious is perhaps the administrative simplicity of expectation damages: by focusing on the contract price or the cost of substitute performance, expectation damages give courts a readily workable measure.

Another possibility, of course, is that the justification for expectation damages as at least the dominant measure of contract damages does not lie in a simple conception of efficiency at all. For example, maybe the main purpose of expectation damages is to prevent unfair speculation by one party against another in rapidly changing marketplaces. The quicker and deeper a market, the more appealing expectation damages appear to become. Of course, this rationale can be framed in economic terms too —one party ought to pay the other to reserve an option to select a future market price rather than the present market price—but it suggests that the orthodox legal-economic view needs to be rethought.

Articles like The Myth of Optimal Expectation Damages highlight some of the dangers in trying to defend too broadly a single remedial measure of supposedly universal applicability by means only of simple theoretical explanations. Its attention to the details of real transactional practice is a useful reminder that the world of contracting is richer than commentators often pretend.

Cite as: Shawn Bayern, A Crisis of Faith in (the Efficiency of) Expectation Damages, JOTWELL (July 22, 2020) (reviewing Theresa Arnold, Amanda Dixon, Madison Whalen, & Mitu Gulati, The Myth of Optimal Expectation Damages, __ Marquette L. Rev. __ (forthcoming), available at SSRN), https://contracts.jotwell.com/a-crisis-of-faith-in-the-efficiency-of-expectation-damages/.

On the Dangers of Beautiful (Contract) Theory

Is there a moral principle that animates contract law everywhere? In his thoughtful book that elegantly spans high theory and ground-level doctrine, Prince Saprai argues that there is not. While contract law in Great Britain might be designed to promote trust through cooperative relations, that is not its exclusive purpose. Moreover, even that purpose is contingent on the particular normative priorities of the British with respect to contract. Saprai says that contract theorists, especially those who promote the idea that contract law tracks promissory morality, are not just wrong about their primary claim but also about their underlying assumption that contract law has an essential governing moral principle that is independent of the commitments of those who use it in a given time and place.

Saprai suggests that contract theorists tend to overclaim in another respect as well. Whatever the constitutive purpose of contract law in a jurisdiction, that purpose is usually not determinative of doctrine in any complete way. There are many ways to interpret the purpose and how it is best served by rule choices. Even systems that espouse the same purpose for contract law are likely to diverge in their substantive doctrines.

The pluralism we should expect from divergent purposes and varied interpretations of even coincident purposes is not a cause for concern. While some dominant views of contract seem to proceed as if there is one optimal law of contract in relation to which each body of actual law is but a pale shadow, Saprai takes pluralism of purpose and doctrine as evidence of legitimacy. The most exciting chapter in Saprai’s book is Chapter 4, in which he elaborates the republican character of his theory and sources it to Dworkin’s view of law more broadly. Saprai reads Dworkin to recommend that scholars not impose a favored moral principle on a body of law but instead uncover it from the ground up in the particular laws of a jurisdiction. Local priority, or looking first to the rules of the immediate area of law that governs a legal question, helps jurisprudence to track how citizens understand questions in each domain. By so tethering doctrine to popular understanding of relevant moral principles, local priority renders legal doctrines accessible to citizens. It is essential to the legitimacy of law, on the republic view, that citizens be able to directly engage and take ownership of law, including contract law.

The picture that Saprai paints is an attractive one. One might reject the idea of a universal contract law, though, without fully embracing the republican alternative he offers. In particular, one might endorse pluralism on avowedly liberal grounds – liberal democratic grounds. The line between a republican and democratic account of contract is not bright but Saprai would seem to emphasize the significance of civic engagement with the law and with one another, and borrowing from Pettit, the commitment to non-domination in one’s social relations rather than rights against the state alone. But civic engagement, or the conditions of public discourse, are important to modern theories of liberal democracy too. Liberal theory might also offer a more compelling account of why private domination is an affront to the liberal subject than does republican theory, which tends to take the ideal of non-domination as more a starting point.

Of course, much of liberal theory fails to concern itself seriously with private domination. The trouble is, this is also true of common law contract. Although Saprai teases out contract doctrines that appear protective of weaker parties as evidence of its fidelity to the non-domination principle, these doctrines appear to operate on the margins. As Saprai himself acknowledges, it is not clear that contract on the whole promotes non-domination among participants in the institution. A republican theory of contract must contend with the facts of rampant domination no less than liberal theory. In light of their influence over mainstream discourse, liberal theorists of contract might need to grapple with a further worry that their historical lack of attention to the problem of domination has actually enabled institutional neglect of the problem – but this worry is justified only to the extent that liberal theories of contract really do track how people think about contract after all.

Cite as: Aditi Bagchi, On the Dangers of Beautiful (Contract) Theory, JOTWELL (June 26, 2020) (reviewing Prince Saprai, Contract Law Without Foundations: Toward a Republican Theory of Contract Law (2019)), https://contracts.jotwell.com/on-the-dangers-of-beautiful-contract-theory/.

Who Should Be Liable When Uber Cars Crash?

Omer Y. Pelled, The Proportional Internalization Principle in Private Law, 11 J. Legal Analysis 161 (2019).

One of the most challenging questions for present day tort law is who should be liable when an Uber car crashes and a passenger or a pedestrian is hurt, the driver or the platform? Similar legal dilemmas arise all over the platform economy. When a defective product sold by a vendor through Amazon’s Marketplace malfunctions or causes personal injuries, can the platform be held liable as a “seller”?

An entirely separate question has for long haunted contract law: should a party be held liable for abandoning negotiations prior to the formation of a contract, if it can be shown that the other party sunk non-salvageable investment in the course of the negotiations? Most courts say no, but in some notable exceptions courts have awarded the disappointed party it full reliance costs. Is this the right result?

These two seemingly unrelated puzzles have recently received a unified and persuasive theoretical treatment in Omer Pelled’s excellent article, The Proportional Internalization Principle in Private Law. Pelled argues that one underlying principle ought to shape the answer to these problems. He regards these as two illustrations of a general problem arising in multi-party interactions: How to apportion liability when the actions of one party, which caused the loss, benefitted others. The principle Pelled uncovers—“proportional internalization”—works by ensuring that each party internalizes an identical proportion of the costs and benefits.

In the Uber example, the driver’s efforts create revenue divided according to a fixed proportion with Uber (say, 70:30). The proportional internalization principle dictates that the cost of liability should also be borne by the parties in the same ratio. When an accident occurs, Uber should be liable for 30% of the harm. Not for the entire loss, as it might be held under a vicarious liability regime, nor a free pass. Dividing the costs of liability in the same proportion the benefits are shared would lead the driver to exert optimal effort.

Or, take the Amazon example. The question it poses has enormous stakes—whether the platform should be held liable for injuries from products sold by one of the many Marketplace vendors. The answer has split American courts. Technically, Amazon is not the “seller.” It doesn’t have title to the products sold by other vendors, and it merely provides the service to connect consumers with vendors. Many courts have therefore held that Amazon is not liable under products liability law (see, for example, a recent decision by a Federal Court in Arizona). But some new decisions, most prominently by the Third Circuit in Oberdorf v. Amazon, reached the opposite result.

The proportional internalization principle breaks the all-or-nothing dichotomy that seems to characterize court decisions. Rather than choosing between zero or full liability, Amazon ought to be liable in part, and its share should equal the share of the benefit it receives from the sale of the product over its platform. “Comparative benefit”—rather than comparative fault—should shape the allocation of liability, and provide optimal incentives for precaution to the vendors and the platform.

In contract law, the question how to share the benefits from a contract, especially when such benefits arise from an investment by one side, is determined by the contract, not by the law. But the law does affect the sharing rule when the contract breaks down. Imagine that the possibility of reaching an agreement leads one party (at the encouragement of the other) to make costly precontractual investments. These investments would be beneficial to both if an agreement is reached. Under the proportional internalization principle, if an agreement fails, the same one-party investments should be costly to both, divided in a manner that approximates how the benefits would have been split.

To illustrate, consider the investments a franchisee makes while negotiating a possible franchise with the corporation. The hopeful franchisee incurs costly reliance expenditures in relocating, training, buying property, and forfeiting other income opportunities, all under some assurance that negotiations are moving forward. If the negotiations fail, courts typically refuse to award the disappointed franchisee any damages: no contract means no liability. But sometimes courts take the opposite view, as the Wisconsin Supreme Court did in Hoffman v. Red Owl Stores, awarding Mr. Hoffmann damages for the non-salvageable portions of his reliance investment.

Again, the proportional internalization principle comes to the rescue. If the goal is to induce negotiating parties to make optimal reliance investments, liability for the investment costs should not be all or nothing. Instead, it should be apportioned based on the parties’ prospective shares in the expected surplus.

Pelled’s proportional internalization principle offers a broad-reaching unified treatment of many problems in private law and indeed the article is rich in illustrations from every corner of the law. It makes a crisp and fundamental observation about the design of optimal liability in situations of joint care or joint benefit. It also lends itself to endless applications that are not analyzed in the article, like the Amazon liability question. Of course, the basic intuition it builds on was recognized and even formally applied in specific contexts in prior literature, but the cross-substantive template was never elicited in such useful way. The article will have much value by offering a simple and intuitive mechanism to address many questions, old and new, in private law.

Cite as: Omri Ben-Shahar, Who Should Be Liable When Uber Cars Crash?, JOTWELL (June 1, 2020) (reviewing Omer Y. Pelled, The Proportional Internalization Principle in Private Law, 11 J. Legal Analysis 161 (2019)), https://contracts.jotwell.com/who-should-be-liable-when-uber-cars-crash/.

I Am Altering The Deal. Pray I Don’t Alter It Any Further.

Shmuel I. Becher & Uri Benoliel, Sneak In Contracts: An Empirical Perspective, 55 Ga. L. Rev. __ (forthcoming), available on SSRN.

Have you ever created an account with Facebook, Amazon, Instagram, or Uber? If so, you agreed—with or without awareness—to let the company that drafted your contract a right to change that contract as they may see fit, without your consent. Shmuel Becher and Uri Benoliel’s empirical new study focuses on this practice, exposing a remarkable reality. With a focus on the central subset of digitally procured standard contracts, their study shows that 95.8% of the firms on their large sample (479 out of 500) have drafted “a change-of-terms clause that enables the firms to change the consumer agreement.” In 94.4% of the cases (472 out of 500), such clause explicitly allowed the drafting company to impose the change one-sidedly. Even to those who, like Margaret Radin, have long argued that standard contracts undermine people’s rights and the rule of law, the authors’ findings may offer a chilling update concerning the world of contracts. The patterns revealed in Sneak In Contracts seem to mimic a famous Star Wars scene in which Darth Vader orders to take the princess and the Wookie to his ship. As you may recall, when Lando protests the order and says it deviates from what was previously agreed, Vader forcefully answers: “I am altering the deal. Pray I don’t alter it any further.”

One of the central roles of contract law is to hold people responsible for duties they consented to assume by forming a contract. This is one of the main reasons for which, once a contract is formed, Anglo-American contract law limits the parties’ ability to change it. In general, even if both parties appear to have agreed to a modification of their original contract, the law would invalidate the alternation if one party coerced the other to consent by exploiting its permanent or temporary superior power. To this end, classical contract law has long required a new and separate consideration to support any change of the initial contract. This formal requirement’s rationale is that it demonstrates that the party that otherwise is not benefiting from the alteration received something in return to consenting rather than was forced to agree. Modern contract law added that a valid modification could be achieved even without supporting consideration if both parties had a reason to agree to the change due to new circumstances that called for it. Yet, modified contracts not supported by independent consideration would only be enforced in as much as the revised contract is also fair. Neither the classical nor the modern approach would have allowed drafting parties (or Darth Vader) to establish what is so thoroughly depicted by Becher and Benoliel: a practice that welcomes one-sided alternations of the deal.

Coining the term “Sneak In Contracts,” the authors describe the rise to dominance of assumed liberty to modify contracts that is trifold. Such liberty includes the drafter’s right to change the original agreement unilaterally, to do so expansively, and to execute it stealthily. Their findings compellingly demonstrate how the vast majority of the study’s reviewed contracts combined all the mechanisms that comprise sneak-in contracts. First, as already mentioned, 472 large corporations, 94.4% of the sample, awarded themselves the freedom to modify their contracts unilaterally. Second, almost all corporations reserved an expansive right to effectuate a change: for any purpose (476 out of 500), and throughout the entire contractual period (479 out of 500). Third, the lion’s share of corporations also took the liberty to make the change stealthily, releasing themselves from the need to let consumers and those who care about their rights know about it. Only 5% to 6% of the 479 corporations that included change-of-terms clauses in their contract promised to notify consumers about the occurrence of a change. All the others (around 94%) refrained from guaranteeing even such a minimal level of transparency. Strikingly and tellingly, none of these 479 corporations committed to notifying consumers about the content of the change.

Becher and Benoliel juxtapose these results with the judicial approach to the issue, one they describe as “underdeveloped, undertheorized and imbalanced.” (P.29.) They explain that their empirical project supports previous arguments that sneak-in contracts are unfair, socially costly, and should not be hastily enforced. For one, allowing firms to modify their standard contracts according to their wishes and whims turns the terms of the original contracts into “Bullshit Promises.” Moreover, by enforcing such sneak-in contracts, courts educate market actors—stronger and weaker alike—that opportunistic market behavior is legitimate. This message, in turn, increases the incentives to take advantage of consumers’ bounded rationality while enhancing consumers’ helplessness. What’s worse, by affirming the hidden nature of the practice, courts make it much harder for consumer watchdogs to do their salient work—raising awareness of risky changes and putting reputational pressure on opportunistic corporations. In the face of all these problems, the authors agree, regulation is in place. In their words: “the law ought to prevent or minimize firms’ ability to take advantage of consumers by using sneak in contracts.” (P.36.)

The main policy question is, of course, how to regulate the harmful practice. Becher and Benoliel describe the possibility of refusing to enforce sneak-in contracts but immediately express a strong preference for what they call “a subtle approach,” (P.37) one that merely attempts to enhance transparency. They argue that requiring firms to first get consumers’ consent to the changes they seek to implement would be too costly. They further raise the following common concern—that in response to being subjected to such a new burden, firms will roll the cost to consumers. However, I must disagree with the quick dismissal of the idea of refusal to enforce sneak-in contracts. One critical way in which firms have been “altering the deal” is supplementing their agreements with prohibitions of collective challenges of their acts. Phrased as “waivers,” such added terms forbid consumers to engage in both class actions and class arbitrations. The waivers take away consumers’ only legal way to overcome their systemic weakness: coming together to protect their rights. And, once the method of sneaky modification was deployed to prevent collective actions, consumers are left divided and conquered, forever deprived of the legal tools most necessary to resisting all the biased changes to follow. It is, therefore, hard to see how increasing transparency—even in the sophisticated way suggested by Becher and Benoliel—can help debilitated consumers to legally cope with future unilateral modifications.

While Becher and Benoliel write that “courts often enforce contracts that allow firms to unilaterally amend their agreements,” courts around the country appear to be sending mixed messages regarding such enforceability. In a very recent case, for example, the court rejected the consumer’s argument that reserving the right to unilaterally change the contract makes it illusory. However, the same court refused to enforce a modification that aimed to remove the consumer’s ability to use class action by adding a term of “mandatory (individual) arbitration.” The fact that courts seem undecided—and many of them hold, as Nancy Kim writes, that “a unilateral right to modify an agreement renders it illusory”—presents, I believe, an opportunity. It allows us to dare to call for a deeper reform than the one proposed by Becher and Benoliel.

Nevertheless, it is certainly possible that the combination of the current political climate and the present structure of the Supreme Court would turn such a call futile. If that will be the case, we may be limited to the authors’ “subtle” and very thoughtful set of solutions to the problem they help in comprehending. Then, besides praying, what the authors propose may be all we will have to constrain “Darth Vader firms” from constantly altering the deal. But, before we resort to the limited consolation that more transparency can offer consumers, we should at least try to protect them more meaningfully by insisting on their consent.

Cite as: Hila Keren, I Am Altering The Deal. Pray I Don’t Alter It Any Further., JOTWELL (May 4, 2020) (reviewing Shmuel I. Becher & Uri Benoliel, Sneak In Contracts: An Empirical Perspective, 55 Ga. L. Rev. __ (forthcoming), available on SSRN), https://contracts.jotwell.com/i-am-altering-the-deal-pray-i-dont-alter-it-any-further/.

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/.