Although contracts may not immediately come to mind when one considers measures by which to effectuate social change, Professor Patience Crowder effectively advocates for their usage in her recent article Impact Transaction: Lawyering for the Public Good through Collective Impact Agreements. Bringing to bear her considerable experience and knowledge of community economic development and nonprofit organizations, Professor Crowder argues that the utilization of written contracts, particularly collective impact agreements, can be a more effective strategy for achieving comprehensive social change than traditional efforts such as impact litigation, memorandums of understanding, and community benefits agreements. In so doing, she introduces “impact transaction” as a new theory for employing transactional advocacy to achieve large-scale social change.
Professor Crowder’s article begins with a detailed critique of traditional strategies used in social change lawyering and public interest arenas. With respect to impact litigation through which advocates seek to reform agencies and institutions by judicial adjudication, Professor Crowder identifies “narrowly defined scopes of applicability,” high monetary and nonmonetary costs, and the adversarial nature of litigation as disadvantages of this approach for achieving widespread social change. (P. 625.) In light of these and other shortcomings, she advocates for a transactional approach grounded in a collaborative collective agreement process “to address a particular social ill.” Such impact transaction, Professor Crowder argues, “can promote the public good in ways that transcend impact litigation.” (P. 629.)
Central to Professor Crowder’s concept of impact transaction is the role of contracts and collective impact agreements. Although nonprofit organizations, businesses, community groups, and social service providers have previously utilized agreements such as memorandums of understanding (MOUs) and community benefits agreements (CBAs) in their efforts to facilitate social change, Professor Crowder details the limitations of such agreements ranging from the nonbinding nature of MOUs to the often localized rather than large-scale impact of CBAs. In describing the process by which collective impact initiatives are formed, she highlights both the positive and negative risks associated with operating in the absence of a written contract. She argues that collective impact agreements through which a diverse group of participants memorialize their expectations as they seek to address important social problems are “the most effective way to actualize the value and minimize the risks of collective impact.” (P. 654.)
Professor Crowder skillfully employs relational contract theory to explain the utility of collective impact agreements in facilitating impact transaction. She argues that the contextual nature of relational contracts is well-suited for collective impact efforts due to the importance of creating and maintaining successful relationships between multiple parties who are engaged in long-term collaborative work. Given that relational contract theory acknowledges the ongoing rather than static relationship between contracting parties, Professor Crowder makes a convincing argument that the theory provides a useful prism through which to view the formation, performance, and interpretation of collective impact agreements, particularly those that are memorialized in a writing.
Although entering into written agreements is not the current norm for collective impact initiatives, Professor Crowder urges those engaged in this transformative work to begin doing so for several important reasons ranging from reflecting and protecting individual and collective interests to clearly specifying parties’ expectations and responsibilities throughout long-term projects. The overarching reason, however, is to improve “the effectiveness of collective impact to be a replicable model for systemic social change as an impact transaction strategy.” (P. 666.)
To assist the collective impact community in this endeavor, Professor Crowder offers useful drafting principles that “support a shared agenda for social change while providing for accountability and respecting the collective impact mindset.” (P. 669.) She identifies collective impact agreements as multilateral contracts that call for the delivery of coordinated services over a long period of time. She encourages parties involved in these transactions to consider the contractual implications of such including, but not limited to, privity, performance standards, risk allocation, and dispute resolution. While these issues can and do exist for many types of contracts, Professor Crowder urges those creating and interpreting collective impact agreements to do so with an awareness of the shared intent, trust, and loyalty upon which such agreements are premised.
Given the complexity of collective impact initiatives, Professor Crowder correctly acknowledges that creating effective, well-structured multilateral agreements will likely be an arduous task, particularly for less-resourced collective impact participants. To address this concern, she suggests creating collective impact term sheets and form contracts that can be used as models for future initiatives. If collective impact is to reach its potential as an impact transaction strategy, it “needs a contractual infrastructure” according to Professor Crowder—one that she hopes to help develop in this and future articles.
Professor Crowder’s thought-provoking article serves as an important and necessary conversation starter regarding the role of contracts in helping to bring about large-scale social change. Considering the myriad number of problems currently plaguing our society, I am very glad that Professor Crowder is engaged in this conversation, and I very much look forward to reading her future contributions.
As Truth-in-Lending laws are celebrating half a century of failure, and as consumers—especially those with low income—continue to make disastrous credit decisions, lawmakers are looking to reboot the disclosure paradigm. Energized by insights from behavioral economics, Twenty-First Century regulators are rapidly discarding the old idea of “comprehensive” disclosure, developing instead psychologically-smart, graphically-appealing, and timely-relevant compact disclosure templates. But now, a new study by Seira et al. has put to the test an array of these smart disclosures. And the results are devastating.
Smart disclosures seem to make perfect sense. If consumers need information to make good decisions, it should be delivered to them in a user-friendly manner. Smart disclosures should provide salient “total cost of credit” scores. They should “nudge” debtors to avoid massive debt, for example by showing them the real cost of making only minimum monthly payments. They should harness “peer effects” by warning people when their debt is above average for similar consumers. And they should arrive via eye-popping easy-to-understand media.
Some of these techniques show modest promise in the lab. But would they work in the real lives of consumers? A few years ago I co-wrote a book on this topic (Ben-Shahar and Schneider, 2014). On the basis of evidence from prior rounds of disclosure reform and a diagnosis why disclosures failed, we predicted that the new round of smart disclosures would not bring improvements. Not surprisingly, our book did not slow down the legions of enthusiastic disclosurites. Hopes were high that behaviorally-informed disclosure regulations would make successful transition from the lab to the street.
Some disappointing evidence began to arrive, primarily in an excellent paper by Agarwal et al. (2015), showing that the 2009 CARD Act reform requiring the months-to-pay disclosure nudge had no meaningful effect. But the recently published paper by Seira, Elizondo, and Laguna-Müggenburg is truly a game changer. It quashes the hope that the new paradigm of disclosure would succeed where its predecessors failed.
The paper reports a large-scale random-assignment experiment conducted in Mexico. With the cooperation of a big bank, new disclosures were sent to tens of thousands of highly indebted credit card holders. These disclosures were designed by the researchers to prompt the consumers to reduce their borrowing and their debt balances. The disclosure were based on the most up to date techniques: salient display of the (personalized) interest rate, a months-to-pay nudge, a “social comparison” informing consumer when their debt was above (or below) average for like customers, pictures suggesting the consumer was in high-risk terrain (like the one depicted below), and even a warning against overconfidence.
Copyright © American Economic Association 2017. Reprinted with permission of the AEA and the authors.
There was every reason to expect some, if not major, effects. The recipients were highly indebted, initially unaware of their interest rate, and overconfident as to their ability to pay their debt. They were paying large portions of their income towards the finance charges. If only they read the disclosures, they could have switched to much cheaper debt (for example, by transferring balances).
But on every measure of response, the innovative disclosures were a miserable letdown. Even when posted saliently, the interest rate disclosure did not change levels of debt, rates of delinquency, or account switching. The months-to-pay disclosure, designed to urge overly optimistic people to make more than the minimum payment, had not effect on debt. Ironically, it led to increased rates of default—perhaps by instilling a sense of apathy among debtors, realizing the futility of trying pay back incrementally.
The peer comparison disclosures had an especially interesting effect. Telling people (half the population) they are higher-than-average risk caused a small decrease in debt. That’s good. But the flip side was that telling the other half that they are lower than average risk caused a corresponding increase in debt. Overall debt payments under this disclosure intervention actually went down by about 10 percent—the opposite of the intended consequence.
The main lesson, the authors conclude, is that “all treatments have zero or tiny effects in all outcomes measured.” They explain that “this zero effect is quite precise and robust across subsamples” and “not due to low statistical power.” Where non-zero effects were found, they “were relatively small and short-lived, lasting only one or two months.”
This is an important paper. It tested the most widely advocated interventions where they were most likely to work and on people most direly in need of them. It was not a make-believe synthetic scenario in a social science lab, but rather in a real market intervention. It assigned treatments and control randomly, and collected observations from more than 160,000 participants. The null effect is therefore best interpreted as affirmative proof that these disclosures had no impact on any important consumer decision or welfare measure.
Why did these smart disclosure fail? Ultimately, because the decisions consumers face are complex. You can simplify the disclosures, but not the problems. Are low-income consumers, who carry large credit card debts, who receive endless notices and prompts from numerous vendors, truly able to read and understand every mailed notice from the bank? Even if the consumers somehow honed in on this specific anguish—how to reduce credit card debt—so much more information would be needed to make good decisions.
More fundamentally, the failure of the smart disclosure reminds us that the problem for most indebted consumers is not information. People know intuitively when they borrow too much, even if they cannot quantify this intuition. The problem for low-income borrowers is, well, . . . poverty. They borrow to pay towards urgent needs. Seira et al. provide a timely reminder that mandated disclosure—including the most methodologically sound version—is not a panacea.
Consider the following everyday scenario as a simplified version of complex contracting. Having been invited to a dinner party a guest asked the host what to bring. “A dessert would be nice,” replied the host, to which the guest responded: “consider it done!” On the morning of the party the guest purchased a delicious cake from a celebrated bakery and was ready to make good on the promise. Sadly, in the evening, as the guest got the cake out of the fridge, it was covered with odd green spots and seemed inedible. Clearly, the guest is at no fault for what just happened, but what should the guest do next: Get another dessert on the way to the party or just go empty-handed? Seana Shiffrin’s thought-provoking article Enhancing Moral Relationships through Strict Liability describes and answers this dilemma as it manifests itself in the domain of contracts’ performance (fault is irrelevant and thus the guest should get another dessert before heading to the party!) — but it goes further and also compellingly explains why demanding full performance of contracts, irrespective of fault, is the appropriate legal approach, both morally and legally.
The article offers a defense of the performance phase of the contractual strict liability doctrine from a novel perspective. The doctrine sets a default rule: unless otherwise agreed between the maker of a promise (promisor) and its recipient (promisee), the promisor is the one who is responsible for full performance, even if reasons outside of his or her control make the task arduous. The “strictness” of the promisor’s duty to perform is restrained only by the doctrine of impracticality that may release the promisor from the burden of performance but merely in extreme and rare cases.
So why, as a general rule, should the promisor be responsible even if he or she is at no fault? Shiffrin’s brilliant analysis offers a fresh justification for this traditional principle. Strict liability, she argues, promotes “a healthier moral cooperative relationship between contracting parties more than a fault-based system would,” offering a “structural background” that plays an important “supportive role in fostering trust.” One salient component of this structural background is Shiffrin’s special theorizing of responsibility—not as emerging from a faulty past but rather as generated by the agency of promisors as they utilize the prospective power of their promises. By divorcing the notion of responsibility from the idea of fault, a strict liability rule allows, indeed empowers, promisors to stretch their agency beyond the limits of their control. In the face of obstacles that make performance harder, strict liability encourages promisors to devote all their energy, creativity, persistence, connections and any other resources to achieving performance, even when—like in the case of the bakery that supplied a defective cake—someone else is at fault. And, as Shiffrin explains, expanding the responsibility of the promisor has a dramatic impact on the promisee. The latter is thereby invited to trust the promisor and is released from having to constantly worry about the performance process, invest resources in preventive efforts, or intrusively scrutinize the promisor. In the dinner party scenario the host can thus focus on, say, cooking and need neither call her guest again (and again) nor purchase a spare dessert. Accordingly, the promisor’s increased responsibility combined with the promisee’s decreased policing has the potential to allow the promisee to depend more on the promisor while granting the promisor a greater moral respect; a positive dynamic that Shiffrin calls “an environment that is more conducive to a morally healthy relationship between the parties.” To illustrate: in such an environment the guest’s effort to get a substitute dessert is not only required, it is also essential to the success of the party and to the preservation of the relationship between the parties.
Shiffrin’s philosophical defense of the strict liability doctrine is forceful and is accompanied by a criticism of the duty to mitigate the harm caused by the breach—a duty that contract law assigns to promisees. Imposing such broad duty on promisees, argues Shiffrin, shifts too much of the burden of failed performance to them while wastefully releasing promisors from the very valuable responsibility they assume under the strict liability rule. In that way, mitigation operates to undercut the relational and moral benefits that strict liability is structured to achieve. Coupled, Shiffrin’s defense of strict liability and her criticism of the duty to mitigate is highly convincing.
And yet, I worry that when a significant imbalance of bargaining power exists between stronger promisees and weaker promisors, strict liability joined with a narrow duty to mitigate may allow immoral behavior and exploitative use of contracts. For example, should a borrower of a payday loan who promised to repay it upon receiving his salary be expected to go as far as selling his most necessary belongings—as the strict liability rule would demand—if his employer doesn’t pay him on time, preventing the borrower from performing? Given the high interest in such transactions and assuming a short delay—shouldn’t the lender be expected to allow for a late-payment? And, although Shiffrin defends strict liability only as a default rule, isn’t it true that weaker promisors in the borrower’s position cannot negotiate away their strict liability? The conventional unforgiving rule is especially troublesome given the fact that our current doctrine of impracticability, as Shiffrin notes, “imposes a rather high bar,” leaving promisors unprotected when events outside of their control undermine their ability to perform. Because I am persuaded by Shiffrin’s general argument and share her belief in the moral value of contractual relationships, I think that a more nuanced treatment of the issue would have been beneficial. Somewhere between the expanded rule of liability and the harsh rule of impracticability there should be room for greater empathy and enhanced protection when applying the general rules to the interactions of destitute promisors with affluent promisees.
Perhaps most importantly, Shiffrin’s article is inspiring much beyond its pronounced premise as it offers a theoretical breakthrough broader than its immediate subject. Readers of scholarship focused on contract law are frequently exposed to the arguments that contract law has (and should have) nothing to do with morality and effective default contractual rules are aimed at creating efficient incentives for parties that are by definition rational self-interested people, not to say selfish. Shiffrin’s approach, in this article and more generally in her notable body of work, envisions an utterly different world and invites a deeper conversation regarding the role of contract law. In this world, contracts are not a battlefield but rather are conceptualized as relationships between humans—humans who are far less rational and selfish than others assume. Equipped with good amounts of emotional and social intelligence such humans are amenable to moral “messages” expressed by the law. Moreover, according to Shiffrin the law itself is not confined to its traditional regulative roles. Instead, the law is portrayed as a unique social institution that has the ability, to use some of the article’s expressions, to proactively “generate,” “facilitate,” “foster,” and “encourage” morally healthy relationships between contractors. Indeed, Shiffrin reminds us that even as the quintessential strain of private law, contract law must serve a public interest: “cultivating and facilitating habits and practices of promissory fidelity and relations of trust, elements of a well-ordered just society.” On this view, supporting the market is not the sole goal of contract law; “Enhancing trust,” to denote the article’s title, is a much more promising aspiration.
It’s hard to think of anyone who analyzes the interstices of the common law better than Mark Gergen, an expert in an almost improbable number of legal fields. By interstices, I mean the spaces that don’t fall neatly into single subjects like contract, tort, or property—for example, the economic torts and the interface between contract and restitution. In Privity’s Shadow: Exculpatory Terms in Extended Forms of Private Ordering, Professor Gergen brings his knowledge of the boundaries of these subjects to bear on a specific recurring pattern of problems: whether exculpatory terms in a contract should prevent a negligence action by a victim who wasn’t a party to the contract.
So, for example, if the standard form contract between FedEx and its customers purports to limit FedEx’s liability to $100, does that term prevent full recovery by a child physically injured when FedEx negligently fails to deliver the child’s hospital’s shipment of the child’s blood samples? Even this relatively straightforward example shows the potential complexity of the problems in this area.
The article is long and intricate, and for that reason it may not have ended up on everyone’s reading list in this age of Twitter and attention-grabbing headlines. But unlike a lot of modern legal scholarship, it helps solve an important problem that courts face, and it does so without gimmickry, stodgy conceptualism, or overly grand and impossibly simple theories.
Professor Gergen aims first to draw attention to the factors that matter in deciding these cases: the reasons for imposing tort liability (on one hand) and what he calls the “quality” of the assent to the exculpatory term (on the other). He analyzes these reasons contextually, in place of courts’ traditional formalistic rules in this area. Courts long have addressed the effects of exculpatory clauses on third parties with conceptualistic principles like “a third-party beneficiary can’t have greater rights than a contract creates” or “a contract cannot eliminate the rights of someone who isn’t a party to the contract”; as Gergen points out, these rules may seem self-evident in some situations, but they make too much turn on often arbitrary determinations, like whether a claim sounds in contract or in tort.
Instead of accepting uncritically that a contract is ”either conclusive or irrelevant to the issue of the availability of a tort claim,” Professor Gergen offers a nuanced, context-specific analysis. Among other things, he shows the potential relevance of contract-law terms to a duty analysis in tort law, several possible roles that informational costs might play in analyzing the effects of third parties on the contracting process, and the (tentative) relevance of property law and the doctrine of equitable notice.
The interstices I mentioned are a ripe area for analysts of the common law, and Professor Gergen’s upcoming work in this area is sure to be equally—or even more—important. For example, at a few recent conferences, Professor Gergen has presented a novel transactional technique by which companies like Google and Facebook might be able to protect the privacy of customer information that falls into the hands of third parties. Analyses of privity, in this light, may cast an even more significant shadow.
In this insightful and well-researched article, Consumer Protection in the Age of Big Data, Professor Max Helveston arguably has opened stage two of a movement in contracts scholarship assessing the dangers and opportunities presented by large scale data aggregation for contract law and practice. Specifically, recent decades of contract scholarship have explored generalized issues surrounding information era contracting practices by producers with access to extraordinary amounts of data regarding their consumers. We could (but probably shouldn’t) refer this early stage as the “Oh crap! What does it all mean?” inquiry; it is probably better to stick with “Big Data & Contract 1.0.” That early stage examined the rapidly changing landscape of consumer-producer interactions in the early Internet and information-era context. The gist of Big Data & Contract 1.0 generally boils down to the proposition that consumers are largely screwed by the ability of producers to use data aggregation and analysis to bore down into consumers’ lives and preferences in a way never before possible in pre-information era contracting.
Despite the broad scope of the title, Consumer Protection in the Age of Big Data moves the discussion to “Big Data & Contract 2.0” by unpacking data analytics and aggregation in a specific contractual context: insurance. Insurance has always been problematic for contract law. The relationship between insurer and insured is traditionally perceived as a paradigm case involving gross inequality of bargaining power. The contracts involved are highly adhesive, consumers generally must depend upon insurance agents to select appropriate coverage and terms, and the resulting terms—which consumers often receive only weeks after they have purchased the insurance and will likely read only when a [hopefully] covered loss occurs—are highly technical and opaque to the typical consumer. This ground is well-traveled, and Helveston addresses the problem from a new angle.
Specifically, after surveying the broader scholarship on information era data aggregation and analysis as well as the privacy and data security concerns these practices raise, Consumer Protection in the Age of Big Data approaches the problem of insurance contracting by identifying the societal interests and norms surrounding insurance contracting. For Helveston, insurance contracts applying advanced data aggregation and analytics promise strong potential benefits. These benefits include increasing actuarial fairness by using Big Data to make more accurate assessments of each customer’s actual risk profile, creating incentives for consumers to reduce their risk profiles, and minimizing moral hazard problems.
But these practices also raise substantial concerns that insurers may use their market power and fine-grained insights into individual customers’ behavior to impair personal autonomy by requiring changes to behavior that reduce insurers’ exposure. Given the inelastic and non-substitutable nature of demand for consumer insurance products, insurers likely already have the ability to begin requiring insureds to agree to coercive lifestyle controls. As Helveston observes, “[i]f the datafication of the world becomes as extensive as some have projected, then a sword of Damocles might loom over many of individuals’ personal decisions.” (P. 33.)
Similarly, Big Data in the insurance industry creates substantial challenges for anti-discrimination norms. While states prohibit insurers from discriminating on the basis of race, religion, national origin, and other protected categories, aggregated data may provide numerous proxies that impose discriminatorily disparate impacts on consumers. As Helveston notes, wrongful discrimination may occur simply on the basis of machine learning algorithms that adjust premiums on the basis of factors correlated with protected classifications that nonetheless do not directly rely upon the insured’s membership in a protected class at all. Humans don’t need to discriminate; the algorithms may do it for us and without our knowledge or intent.
Helveston also notes that the ability of Big Data practices to provide potentially near perfect actuarial fairness in insurance contracts may ironically violate equality norms. As insurers develop more finely nuanced data regarding consumer risks, it becomes more likely that they will discover and price activities that correlate with risk. In this regard, Helveston observes, “[t]his is particularly disconcerting because many of the qualities that would lead insurers to confer beneficial treatment to an individual are not merely qualities that indicate that she possesses a low-risk profile, but are also qualities that cause one to receive more favorable treatment across social institutions.” (P. 33, n. 163.) Big Data practices thus threaten to exacerbate existing social and economic inequalities by pricing already disadvantages high-risk individuals out of the insurance market. In a related observation, insurers may similarly use such data practices to identify individuals least likely to contest a denial of coverage as well as to closely estimate the amount individuals would accept in settlement of their claims.
Helveston concludes by recommending federal regulation of consumer insurance contracts. In particular, Helveston proposes three key components for reform—community rating, policy content review, and prohibitions on consumer profiling. While I disagree substantively with the case for a single regulatory response to consumer protection in this area—the regulatory and government-induced market failures in the Obamacare/Affordable Care Act context suggest that the federal government has little expertise or competence in this area—Helveston makes a compelling case for reform.
This article is particularly important for the next stage of scholarship regarding data aggregation and analysis and its impact on contract law and practice. Helveston’s research is careful and his insights are challenging. More importantly, this article brings the Big Data & Contract 1.0 general field down to brass tacks by addressing a specific industry and the contracting practices that are impacted by Big Data practices. Information-era contract practice has matured, and this article calls us to examine the particularized implications of that field.
Cass Sunstein’s thoughts about the ethics of regulation are of more than theoretical interest. He served as Administrator of the White House Office of Information and Regulatory Affairs and has successfully championed the use of behavioral sciences in policy design. “Nudge,” which he coauthored with Richard Thaler, describes the use of choice architecture, or the background conditions for people’s choices, to improve outcomes. Sometimes outcomes are improved from the standpoint of others, as in environmentally-friendly defaults. Sometimes nudges are intended to improve outcomes for the very people (apparently) making the choices.
The Ethics of Influence takes on the objections raised against nudging. Nudging requires that someone decide the direction in which people should be nudged. Nudging can be opaque or even manipulative. Nudging can be a really creepy way for elites within the state to control private individuals, under the radar. The book takes on these potential problems directly and systematically. In part, it parses out benign from insidious nudging. Sunstein simply rejects most of the worst examples and allows that there are domains of private decision-making where nudging is simply inappropriate altogether. He distinguishes nudges that exploit cognitive defects in order to direct people toward behaviors that they would reject from nudges that prompt deliberation and choice.
His distinctions are useful. But as defenses they are not always reassuring, since one wonders who will draw lines in practice (it cannot always be Professor Sunstein himself) and one worries that the enormous and obscure power of nudging might lend itself to expansive application. In fact, it might be useful to redirect some of the scholarly attention presently focused on the minds of the nudged to that of the psychology of nudgers and other regulators.
Many critiques of nudging are not limited to what Sunstein would regard as its abuses. General critiques question the picture of human agency at the center of choice architecture. There is unease with the ability of regulators to engineer behavioral outcomes without ever owning up to a clear mandate.
One of the important strengths of the book is that Sunstein takes these lines of critique seriously and presents them generously. He rejects a concept of manipulation that would attach to most of the regulatory measures that he would endorse but he adopts in its place a credible conception of manipulation as an effort to influence people’s choices without sufficiently engaging or appealing to their capacity for reflection and deliberation. He doubts most nudging can be characterized as manipulative on these terms.
I have not offered many examples of the kinds of nudging he has in mind; the ones of particular interest here concern the background rules for contracts, especially contracts in the employment and consumer contexts. Although the book is obviously not interested exclusively or even primarily in contract law, Sunstein observes early on that “the common law of contract . . . is a regulatory system, and it will nudge, even if it allows people to have a great deal of flexibility.” (P. 35.) Contract law is not a spontaneous system of private ordering. Contracts are incomplete and courts rely on default rules. Default rules are nudges.
Perhaps the most powerful point Sunstein makes in favor of nudging is the idea that in many cases, there is no alternative to nudging. The question is rather whether people should be nudged deliberately and cautiously, with system-awareness about the effects of a regulatory rule. One can try to argue in favor of less calculating nudges—eg majoritarian defaults that are intended to reconstruct parties’ preferences—but Sunstein is persuasive that such inadvertent pushes are likely to be plagued with many of the same problems associated with regulatory nudging, and we have no reason to assume that spontaneous orders will be benign. People always make choices under background conditions that compromise our picture of what free choice entails.
It might be that it what is most disturbing about nudging as a regulatory tool is the human predicament on which it depends, and not the nudging itself. We cannot blame Sunstein for that. And if the most unsettling aspect of nudging is the lack of self-awareness that this regulatory tool projects onto (or merely observes of) private individuals, its greatest appeal may be the great self-awareness it demands of regulators. I am less optimistic than Sunstein that regulators can achieve clarity of purpose and successfully walk the line between legitimate and manipulative choice architecture. But readers are likely to be persuaded that this architecture should be deliberate and subject to scrutiny. As individuals, we might not be able to make our contracting choices with full awareness of how those choices are framed, or we might not wish to exhaust ourselves by internalizing that perspective. We might have a better shot at regulating the regulators, or collectively setting the terms by which our individual choices are framed. Politically accountable nudging might be another opportunity to exercise agency collectively in the face of unavoidable limits to individual agency.
Matthew Jennejohn, The Private Order of Innovation Networks
, 68 Stan. L. Rev.
281 (2016), available at SSRN
Relational contract scholarship is at a pivot point. On the one hand, the relationalist revival that has dominated contracts scholarship for almost half a century may be on the wane. Relational contract scholarship has evolved during this period into separate, and often dueling, intellectual traditions. One camp consists of scholars who are typically associated with the “law and economics” movement; in the other camp are scholars who more readily identify with the “law and society” tradition. While relationalists have been quarreling with each other, a younger cohort of law and economics scholars, armed with impressive technical skills, have abandoned relational questions in favor of projects that are capable of being analyzed through formal models or sophisticated empirical techniques. In turn, many other of the brightest stars in contract are formally trained in analytic philosophy and focus their energies on classical contract doctrine and the extent to which it adheres to deontological principles grounded in Kantian notions of autonomy. At its best, this new contracts scholarship is analytically elegant and generates counter-intuitive insights. But its analytical rigor requires strong simplifying assumptions. As a consequence, the bulk of this work is a far remove from the complex environment of relational contracting.
This pessimistic view of the legacy of relational scholarship is tempered, however, by the rise of a new institutionalist school of contract scholarship that offers the promise of an accommodation between the dueling branches of relational theory and a counterweight to the elegant but abstract analysis of the philosophers and economists. The new institutionalists reflect the older relationalists in their commitment to the belief that the institution of contract can only be understood by observing the law “in action,” but they go beyond relational theory to explore both the potential and the limitations of contract design in a world of uncertainty: how can we understand the circumstances in which different contractual patterns are used to organize different kinds and speeds of innovative activity? A particularly noteworthy example of this new institutionalist school is a recent article by Matthew Jennejohn, The Private Order of Innovation Networks, published recently in the Stanford Law Review.
Jennehohn’s project is to deepen our understanding of the “collaborative methods of innovation that have become a centerpiece of modern economic organization.” (P. 281.) In a number of industries characterized by rapid technological development, conditions of high uncertainty have led to collaborations where both parties’ skills and commitment to cooperate are necessary to achieve success. In settings as diverse as the pharmaceutical industry and manufacturing supply chains, parties have come to realize that the feasibility of many projects can only be determined by joint investment in the production of information to evaluate whether a project is profitable to pursue. A particularly salient example is the research collaboration between a large pharmaceutical company with expertise in bringing new drugs to market and a smaller biotech firm with innovative technology. The collaborative agreement seeks to discover, design and develop a novel pharmaceutical product, and then take that product through the FDA approval process and through commercialization. The common feature of all these regimes is a commitment to joint exploration without imposing legal consequences on the outcome of the parties’ collaborative activity other than in conditions of “bare-faced cheating.” Thus, neither party has a right to demand the performance that the parties imagine may result from a successful collaboration. If the parties cannot ultimately agree on a final objective, they may abandon the collaboration.
Jennejohn’s starting point is a critique of the “braiding theory” developed by me and my co-authors, Ron Gilson and Chuck Sabel, that offers an explanation for the peculiar features of these collaborations. Braiding theory argues that the collaboration rests on a governance structure that, over time, creates confidence in the capabilities and trust in the character of the counterparty. Viewed through this lens the governance of these commercial collaborations shares several common elements. The first is a commitment to an ongoing mutual exchange of private information designed to determine if a project is feasible, and if so, how best to implement the parties’ joint objectives. The second is a procedure for resolving disputes. Its key feature is a requirement that the collaborators reach unanimous agreement on crucial decisions, with persistent disagreement resolved by unanimous agreement at higher levels of management from each firm. Together, my co-authors and I argue, these two mechanisms make each party’s character traits and substantive capabilities observable and forestall misunderstandings. Working under conditions of uncertainty, the parties can expect to encounter unanticipated problems that can only be solved jointly and that may generate occasions of disagreement. Their increasing knowledge of each other’s capacities and willingness to share private information in service of their collective goals facilitates the resolution of problems and constrains opportunistic behavior.
Jennejohn’s principal critique is that braiding theory’s exclusive focus on opportunism is too narrow. Rather, he argues, these collaborations must also respond to two other problems that can cause these alliances to fail. The first is the risk of “spillovers”: the costs that arise when property rights in these innovative activities are not sufficiently defined and thus can bleed out of the effective control of the relevant commercial actors. The second problem is “entropy”: the need to coordinate the routines that translate inputs into the successful team production of outputs. Collaborators under this framework must trade off the governance mechanisms that constrain opportunism with mechanisms that limit spillovers and reduce entropy. His analysis of prototypical collaborations together with the preliminary results of an ongoing empirical project suggests that this multivalent approach better explains observed variations in design strategies in many alliance agreements. The result is a richer but more complex (and thus less clean) conception of the factors that undergird the design of collaborative contracts.
Jennejohn’s substantive critiques and his careful consideration of spillovers and entropy add importantly to our understanding of how collaborative alliances function. But more significant is the way his work melds the formerly disparate strains of relational scholarship. While his analytical techniques are clearly in the law and economics tradition, his methodology borrows importantly from the work of Ian Macneil. Like Macneil, Jennejohn offers a rich and complex story of contracting practices that is not amenable (at least not yet) to an elegant theory. Like Macneil (and others working in the law and society tradition) his methodology is “bottom up” empiricism, using both qualitative and quantitative techniques to build understanding over time. This stands in opposition to the economic relationalist approach of “top down” theorizing—using a widely accepted theory to isolate the salient elements that influence commercial parties’ behavior. Thus, like others working in this new institutionalist tradition, Jennejohn uses the analytic tools of law and economics to offer a rich descriptive account in the spirit of the law and society approach in order to describe how collaborative contractual arrangements function in a complex economic environment.
The accommodation between the law and economics and law and society methodologies reflected in Jennejohn’s work offers hope that we might free the relational enterprise from its current peril: those who believe that contract law scholarship requires attention to the ‘law in action’ need to concentrate their energies on developing unifying themes that will permit the relational project to be as vibrant and influential in this new century as it has been in the last one. Jennejohn’s work looks to just such a unification. What we need now are the voices of other “institutionalists” who will continue to examine the complex environment of contracting and propose principles that best explain how real world institutions maintain and support the ideal of human engagement through cooperative endeavor.
Lauren Henry Scholz, Algorithmic Contracts
, Stan. Tech. L. Rev.
(forthcoming 2017), available at SSRN
Most law students are digital natives who have been using computers since grade school, while I, a baby boomer, remain an immigrant to the world of e-communication. Yet the old and new worlds may not be as different as they sometimes seem. Five years ago, publishers expected to replace hard copies with electronic casebooks, but it turns out that millennial students seem to learn best with a hybrid of electronic and hard copy materials that allow for interactive elements like on-line multiple choice quizzes.
With exceptions like the Uniform Electronic Transactions Act, digital immigrants have left to the natives the task of figuring out how doctrine should treat computer-generated communications. If electronic communications enable transactions that have never occurred before in the hard copy world, lawyers, scholars and judges must figure out whether those transactions require new and special rules or fit within the old common law rules. Lauren Henry Scholz’s article Algorithmic Contracts, forthcoming in the Stanford Technology Law Review and available in draft form on SSRN, substantially contributes to this conversation by suggesting that old-fashioned agency principles can be repurposed to govern algorithmic contracts.
Scholz, a fellow at Yale’s Information Society Project, provides a taxonomy of algorithmic contracts, reviews their dangers, considers possible regulatory responses, and concludes that agency principles work best. Her core contention is that algorithms are not mere tools like calculators, nor the equivalent of form contracts, but instead quasi-animate actors that legal doctrine should treat like robots or human servants of the people and entities that put them into action.
Readers learn that proprietary algorithmic contracts generally determine price and other terms in high frequency securities trading, and increasing facilitate dynamic pricing in consumer transactions such as the purchase of airline tickets. Much of this sounded familiar until I got to the section on Ethereum or smart contracts that take automation to a new level. In this world of Bitcoin and other virtual methods of transacting, Scholz explains,
Blockchain technology, which can roughly be described as a decentralized database, enables “trustless” transactions: value exchanges over computer networks that can be verified, monitored, and enforced without centralized institutions. (P. 29.)
A “public leger . . . records every transaction that has ever been made and will ever be made on the Bitcoin network” and distributes copies to users, who all agree to comply with the Bitcoin protocol. Apparently these agreements are “self-enforcing” via a “contract [that] is defined by the code and is also automatically being enforced by the code that defines it.” (P. 30.) Setting aside whether this Bitcoin protocol itself is a contract, Scholz’s analysis makes clear that contract theory and doctrine must ready tools to understand and regulate transactions that purport to be self-enforcing. (P. 30.)
Not surprisingly, these opaque mechanisms are vulnerable to mistakes and fraud. Scholz suggests that algorithmic contracting may cause flash stock market crashes that yield losses in the millions, and the algorithms’ very opaqueness allows the banks and others who put the algorithm into operation to evade liability for losses they cause by asserting a defense along the lines of “the code made me do it.” That view, Scholz contends, mistakenly treats algorithms as mere tools. If instead algorithms are akin to servants—as she convincingly argues—then principles of respondeat superior bind those principal and create incentives for them to both monitor the algorithmic contracts and also to refrain from mischief.
Moreover, Scholz argues, algorithmic agreements may not even be binding contracts because the participants lack the knowledge of the substance of the transaction to form the requisite mutual assent. In addition, the agreements lack consideration if they parties do not know the content of their offers or acceptances, because those promises can hardly induce each other. As a matter of law on the ground, she explains that the Commodity Futures Trading Commission
cannot pursue a successful case against companies that use algorithms to make the trades because the laws require either specific intent or outright recklessness. The algorithms are considered to be too attenuated from the intent of the companies who use them to rise to that level of intent. (P. 59.)
Algorithmic Contract’s analysis helps regulated communities—consumers and businesses alike—make sure that the banks and other activators of the algorithms cannot treat the agreements as legally binding contracts or mysterious communications out of their control as they find convenient.
Scholz joins other scholars who apply common law—including agency principles—to electronic transactions, including Danielle Citron’s Hate Crimes in Cyberspace (2014), Frank Pasquale’s The Black Box Society (2015), and William Reynolds & Juliet Moringiello’s The New Territorialism, 99 Cornell L. Rev. 1415 (2014). By providing specific ways forward for a variety of stakeholders, she both sounds the alarm and shows the way to an exit from the dangers of algorithmic contracting.
Martijn W. Hesselink, Contract Theory and EU Contract Law
, in Research Handbook on EU Consumer & Contract Law
(Christian W. Twigg-Flesner ed., forthcoming), available at SSRN
Some analyses are particularly suitable for novices, while others suit experts. Few analyses may be of interest to both. Martijn Hesselink’s contribution to a forthcoming handbook on EU Consumer and Contract Law belongs to the latter category. In this chapter, Hesselink discusses the “mismatch between much of the existing contract theory, on the one hand, and EU contract law on the other.” Ostensibly, this discussion is only relevant to a narrow audience—namely, the rather few (especially in the United States) who are interested in both contract theory and EU contract law. In fact, however, this chapter would benefit anyone interested in contract theory even if they have little interest in EU law—or conversely, anyone interested in EU contract law who may not care much about contract theory. Indeed, reading this chapter may persuade U.S. contract professionals that they should take interest in EU law, and convince EU contract people that contract theory is important to understanding their field in a broader context.
Hesselink’s chapter consists of three parts. The first part provides a highly useful typology of contemporary theories of contract law. The second delineates EU contract law and describes its basic features. The third part points to the mismatch between most contract theories and EU contract law, and explores its ramifications.
In recent decades, the terrain of contract theory has become increasingly large and complex. Hesselink provides a concise, lucid map of this terrain, based on a series of distinctions. Inter alia, these include the distinction between contract theories and contract law theories (the latter are the sort that jurists are usually interested in), and between positive, explanatory theories and normative ones (pointing to the existence of hybrid theories that set out to both explain existing law and assess it normatively). Another important distinction, within the categories of normative and hybrid theories, is between those derived from more general, moral or political theories, and separatist theories, which view contract law (and private law more generally) as being founded on principles of its own. The former include welfare economics (the normative part of economic analysis), various brands of liberal and libertarian theories, as well as communitarian and discourse theories of contract law. The latter category, i.e., that of separatist theories, is epitomized by corrective justice theories of private law. Cutting across these distinctions is the division between monist and pluralist theories of contract law, which has attracted considerable attention in recent years. Hesselink briefly describes and situates several hybrid or ambiguous theories within this typology—including functional theories, sociological system theories of law, interpretative theories, critical theories, and constitutionalism.
While some of these distinctions are familiar to anyone engaged in contract theory, others are articulated in a new, insightful fashion. Moreover, while some of the theories Hesselink mentions are well-known in the English-speaking world of legal scholarship, some are less so—thus triggering an interest in ideas developed by civil law and EU scholars.
The second part of the chapter provides a bird’s-eye view of EU contract law. This term does not refer to the entirety of contract law norms in European countries, but only to those contained in EU law—namely, to directives, regulations, EU treaties, and general principles recognized by the Court of Justice of the European Union. The directives instruct member states to adapt their local laws to comply with the standards set by the directives—often leading to legislative reforms in national laws. The directives do not deal with contracts between individuals, but mostly with specific issues in particular types of consumer, and some commercial, transactions—such as unfair contract terms, unfair commercial practices, package travel, late payment in commercial transactions, and consumer credit. In each sphere, the directives do not comprehensively regulate all aspects of the contract, as do national laws. The consumer law directives place special emphasis on elaborate disclosure duties, and on the right to unilaterally withdraw from the contract. Since these directives do not directly confer rights to contracting parties, analytically they are part of public law. However, since their content refers to the relationships between the contracting parties, they concern typical contract issues.
In the third part of the chapter, Hesselink examines the extent to which the fragmented, multi-layered, and incomplete body of EU contract law may be explained and normatively assessed by the familiar theories of contract law. He finds that leading theories (especially the monist ones), such as contract as promise and corrective justice, cannot explain or justify EU contract law, and other perspectives, such as economic efficiency, would more likely criticize it on many counts, than endorse it. Hesselink examines the possible implications of this mismatch, including the possibilities that: (1) EU contract law should be abolished; (2) EU contract law is not “contract law” at all; and (3) existing contract theories are deficient. Ultimately, he endorses a pluralistic, democratic theory of contract law. Such a theory would rest on “political principles of justice, including private law justice, that can be accepted by citizens adhering to different faiths, philosophies, values and principles.” He concedes that such principles, “if they can be found at all, will inevitably be of a much higher level of abstraction and generality than familiar contract law rules and doctrines,” and “will leave much room for interpretation and concretization through legitimate political institutions.”
Hesselink does not elaborate on his theory of contract law in the present chapter (he does so in his Democratic Contract Law, 11 Eur. Rev. Contract L. 81 (2015), available at SSRN)—nor will I. Personally, I am less skeptical about the contribution of extant theories to explaining and normatively assessing EU contract law, and more skeptical of the promise of a more procedural and “thinner” theory of the kind proposed by Hesselink. Nevertheless, I find the discussion extremely valuable. The intriguing attempt to apply contract theory to the unique body of EU contract law should prompt one to rethink those theories, to pay greater attention to theories developed by civil law and EU scholars, and to take interest in EU contract law as a source of inspiration.
When Amazon announced that it was expanding its Dash Button Program, its stock went up 2.3%. Amazon’s Dash button refers to a wi-fi enabled device that can be attached to a cupboard or refrigerator and allows a customer to order a specific item, such as more laundry detergent, simply by pressing the button. While some wondered whether consumers really needed this, others wondered whether the law was ready for this. As recent events reveal (such as the tragedy of Tesla’s self-driving automobile accident), technology is raising legal questions more quickly than lawmakers can anticipate or respond to them. In her article, Contracting in the Age of the Internet of Things: Article 2 of the UCC and Beyond, Stacy-Ann Elvy considers whether contract law is ready for the Internet of Things, and concludes that the answer is a regretful but resounding No. Contract law is woefully behind the times when it comes to dealing with issues raised by the Internet of Things (“IOT”). Elvy does a frightfully good job of identifying some of the potential problems—are such devices agents? (Probably yes). How should courts assess consumer assent when contracts are entered into through IOT devices? (It’s complicated). Perhaps most frightening of all—won’t the “legion of data” generated by the IOT worsen the preexisting information asymmetry in favor of companies? (Certainly).
Elvy’s article makes three primary arguments. First, where IOT devices enter into contracts on behalf of consumers, existing laws regulating e-commerce may not adequately protect consumers. Second, Article 2 of the UCC and contract law generally are ill-equipped to deal with the IOT. Finally, information asymmetries, exacerbated by the data generated by the IOT, will shift the power balance even more in favor of companies. Elvy makes certain proposals to recognize and respond to these changes in the contracting environment brought about by the IOT. Her proposed changes to Article 2 include prohibiting post-contract formation disclosure of terms in consumer IOT contracts, prohibiting the use of unilateral amendments and defining unconscionability to include high levels of information asymmetry. Elvy also recommends that courts consider the extent to which consumers can access and control the data which they generate. Her proposals are exhaustive and thoughtful and well-worth a read. A short review does not do them justice.
In making her arguments, Elvy responds to anticipated critiques, including the stale and timeworn arguments that consumers have a duty to read and that form contracts lower transactions costs. She also counters the more recent argument that the IOT will increase consumer bargaining power and decrease information asymmetry.
Assent to mass consumer contracts, of course, was a problem even before the IOT. It became a bigger problem with wrap contracts—where clicking, swiping and tapping were viewed as sufficient to trigger a duty to read. But, as Elvy notes, the Internet of Things threatens to make online contractual assent even more fantastical with the introduction of electronic contracting agents. Elvy refers to the growing distance between consumers and contracts as “contract distancing” and argues that the “notice and opportunity to read” test creates even more problems when it comes to the IOT. Of course, she’s right. The more removed the consumer is from the act of contracting and the harder it is to access the actual terms, the less real the consequences of that contract seem. If you can even call it a contract.
Elvy’s final recommendation is that the Uniform Law Commission and the American Law Institute (which is currently working on a Restatement of Consumer Contracts) consider the changes to the contracting environment brought about by the IOT. The UCC and the Restatement (Second) of Contracts recognized how changes in the marketplace created changes in contracting behavior. In order to stay true to the underlying objective of contract law (which after all, is the fulfillment of the reasonable expectations of the parties, not maximizing efficiency or eliminating transaction costs), the ULC and the ALI shifted doctrinal rules to fit the marketplace. The commercial landscape has shifted once again. It is high time for contract law to respond.