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Debunking the Myths of Law and Economics

In his book, The Analytical Failures of Law and Economics, Shawn Bayern tackles what, for a time, was arguably contract law’s leading school of thought, and argues that the emperor has no clothes. Bayern is not the movement’s sole critic; however, his critical approach is different because he adopts “analytical techniques, often of a type similar to those that have driven the legal-economics movement forward, in order to show that many leading legal-economic arguments would not reach their goals on their own terms.” (P. 3.) Thus, Bayern challenges law and economics theory with law and economics reasoning. (Maybe sometimes the Master’s tools can be used to dismantle the Master’s house).1 The book covers property, tort and contracts, but this review focuses on contracts.

Bayern starts with two important clarifications. First, he is not arguing that efficiency is not important. However, the “orthodox American law-and-economics movement” is a “poor way…to achieve efficiency” (P. 5) and “efficiency “is not the law’s only goal, does not have a singular definition, and is not always easy to recognize.” (P. 5.) The second clarification is that the law and economics movement has not been “worthless”; however, when it comes to “specific, determinative conclusions about legal policy” the movement “fails.” (Pp. 5-6.)

Bayern’s gloves-off writing style makes for easy reading, quite an accomplishment given its relatively dry subject matter. For the past few decades, the legal academy in general and contracts scholarship in particular, has seemed to be enamored or at least, highly deferential, to the law and economics movement (L&E). But Bayern suggests that L&E’s contributions are overblown in some ways and unremarkable in others. At its most useful, it is just what the law has always done which is consider economic reasoning in outcomes. In this form, it is, as Bayern notes, “not flashy” or “counterintuitive” but rather “tries to integrate broadly economic techniques with sensitivity and caution into the law.” (P. 6.) At its most self-important and presumptuous, however, it is a failure that robs the law of “its deeper efficiencies” and returns “only a mechanical- and usually politically right-wing –understanding of economic policy in its place.” (P. 6.)

And with that one-two punch, Bayern is off to the races. He lays the groundwork with a general critique of “several general patterns of analytical failure in legal-economic argumentation.” (P. 12.) These recurring failures include “ungraceful degradation” (P. 14.) because of its unrealistic assumptions, notably about human rationality but also about the state of the world and how it operates. Economic models may (sometimes, even often) work under perfect circumstances, but an argument based upon an economic model fails “to have any explanatory or justificatory force if the model is even slightly imperfect.” (P. 15.)

Bayern doesn’t shy away from toppling giants in the field or questioning the tenets of L&E classics. One such classic is Richard Posner and Andrew Rosenfeld’s “foundational” article on impossibility and related doctrines.2 According to Bayern, their article argued that, all things being equal, parties (being self-interested and rational) would negotiate to make their contracts efficient; thus, contract law should allocate risks in the way the parties would have done if they had considered the issue. Bayern argues that their argument “fails to recognize…that not all contracts are negotiated in a perfect world in which parties can maximize the surplus of individual contracts.” For example, companies that employ agents to negotiate their contracts might impose rules to reduce agency costs which “may prevent agents from negotiating optimal individual contracts.” (P. 15.) In other words, assumptions about rationality, and even what is efficient, risk “tampering with that contract in ways that the parties would not at all have intended.” (P. 15.)

Another analytical failure of L&E is the “neglect of alternatives” which ignores that “even if an activity is productive…other activities may be more productive.” (P. 18.) Bayern observes, “This is like saying that being a manufacturer produces wealth, so we should encourage college graduates to become manufacturers.” (P. 18.) There are other failures (I especially like the “terror of costs and externalities”) but “ungraceful degradation” and “neglect of alternatives” seem to be particularly relevant to L&E as applied to contracts and contract doctrine.

According to Bayern, perhaps the biggest “misstep” is the theory of efficient breach”: “First, it is almost entirely wrong. Second, it has achieved quite a significant following; it is taught uncritically in many or most first-year Contracts courses in the United States.” (P. 86.) While influential among academics, it has an unimpressive track record in the real world: “Courts have never seriously adopted the rule….When given an opportunity to apply the theory of efficient breach…the law tends to hold otherwise across a wide range of questions and legal disciplines.” (P. 87.) Even Richard Posner, when faced with the opportunity, “rejected the theory.” (P. 89.) If Judge Posner isn’t going to apply efficient breach in the real world, then who is?

Bayern also tackles the new business rule and contract interpretation, “the trickiest, the most important, and the most litigated question in contract law.” (P. 99.) Here, Bayern notes that L&E favors textualism over contextualism because it is presumably more efficient; however, why it is more efficient is unclear. It is either because it lowers transaction costs (P. 99.) or reduces litigation costs” (P. 100.) Bayern dismantles each of these arguments in turn.

The 2008 crisis exposed as myths some of L&E’s assumptions, tarnishing the movement’s sheen. Bayern’s book provides the intellectual firepower to further debunk these myths. For those who have rolled their eyes at the impracticality of some of L & E’s assumptions and solutions, Bayern’s book is a warmly welcomed and long-awaited addition to contracts scholarship.

  1. With apologies to Audre Lorde who famously stated, “The master’s tools will never dismantle the master’s house.” Audre Lorde, The Master’s Tools Will Never Dismantle The Master’s House (2018).
  2. Richard A. Posner & Andrew M. Rosenfeld, Impossibility and Related Doctrines in Contracts Law: An Economic Analysis, 6 J. LEGAL STUD. 83 (1977).
Cite as: Nancy Kim, Debunking the Myths of Law and Economics, JOTWELL (March 15, 2024) (reviewing Shawn Bayern, The Analytical Failures of Law and Economics (2023)), https://contracts.jotwell.com/debunking-the-myths-of-law-and-economics/.

Maybe Odysseus Was a Capitalist?

Marietta Auer, Bargaining with Giants and Immortals: Bargaining Power as the Core of Theorizing Inequality, __ L. & Contemp. Probs. __ (forthcoming), available at SSRN (Aug. 28, 2023).

In this article, Marietta Auer, Director of the Max Planck Institute for Legal History and Legal Theory, takes a sophisticated and nuanced look at the role of unequal bargaining power as it relates to both economics and legal theory. From my own perspective as an unrepentant libertarian and capitalist, there is much in the article with which I disagree. However, Auer’s observations on the importance of bargaining power inequality, the relationship between law and markets in a [quasi-]capitalist economic and political system, and the futility of attempts to use law to redistribute bargaining power among market actors are insightful, creative, and require engagement by those working on the problem of bargaining power.

Auer’s analysis begins with a survey of both classical and neoclassical economic arguments regarding the neutrality of markets. According to Auer, under the classical conception of private law in relation to markets, “the ground rules of private law, in particular property and contract law, provide a politically neutral framework that enables market transactions among equals.” (P. 6.) While it is questionable whether and to what extent legal scholars and courts of the so-called formalist period in American law and jurisprudence actually adhered to the classical conception as described by the later American Legal Realists,1 the advent of American Legal Realism addressed the apparent disconnect between classical contract and property law versus practical economic realities in which facially neutral legal rules promoted exploitation and coercion in transactions affected by bargaining power disparities. As noted (with a big helping of judicial hubris) in what appears to be the first U.S. case to recognize explicitly the legal concept of inequality of bargaining power:

Our enlightened modern thought realizes that an equality of bargaining power between two such unequal parties [employees and employers] is impossible, and has attempted to equalize the balance through the labor unions and state regulation of industry; but old ideas die hard, and the pathways of progress are strewn with the fragments of legislation designed for this purpose but wrecked on the insistence of court after court that the state must not interfere with the ‘free right of contract.’2

As a result of Legal Realist influences, significant areas of contract law were subject to legislative efforts to redistribute bargaining power where transactions in those fields were perceived to suffer from significant inequalities, such as consumer transactions, labor law, and housing. (Pp. 7-8.) Auer notes, however, that in these fields:

[T]here are cases where the strategy of redistributing bargaining power through mandatory terms in private law transactions systematically fails to reach its goal and is actually ‘hurting the people one is trying to help,’ as Duncan Kennedy likes to put it. … The additional cost imposed by the mandatory contract term on the seller, landlord, or employer will likely not lead to the intended redistribution of wealth to the weaker market side, but will in fact be passed on to the buyer, tenant, or employee through higher prices or fewer opportunities of contracting. (P. 7.)

Following this introduction and historical review of classical, Legal Realist, and neoclassical jurisprudence relating to bargaining power disparities, Auer reviews current trends in critical jurisprudence, particularly in Law & Political Economy. Of particular importance, Auer observes critical arguments suggesting that if markets are created and shaped by law, then law should be used to reshape markets to accomplish redistributionary goals. (Pp. 10-12.) After observing that such arguments have failed to account for the actual “formally egalitarian structure of private law,” Auer moves to the primary argument of the article – namely that “there is a way to decode the myth of private power: understanding bargaining power.”

I argue that this [legal] understanding of unequal bargaining power is undertheorized because it misses the economic function of the mechanism of bargaining power in capitalist bargaining situations. This is a serious theoretical shortcoming because lawyers, as a consequence of the sociological fallacy of intuiting the power differential between the parties from an ad hoc mélange of criteria oscillating between the actual power to negotiate and the social status of the negotiators, systematically overestimate the regulatory potential of the law with respect to offsetting the effects of unequal bargaining power. As it turns out, the law cannot do much about unequal bargaining power in capitalist market transactions. (P. 13.) (emphasis added)

This paragraph is an extraordinarily important insight for contract doctrines dependent upon the concept of inequality of bargaining power. Bargaining power, as I’ve argued in past articles,3 is irreducibly complex and dynamic, often changing radically based upon new information, deceit, bluffing, availability of alternatives, access to legislative or regulatory bodies, and other factors. In cases applying contract law to individual disputes, courts are incompetent in determining which of the parties possessed superior bargaining power and which walked away with a greater share of the transactional surplus. Instead, both courts and legislatures conceal this incompetence behind a façade of poorly constructed status-based criteria that generally ignore reality in favor of presenting analysis that can be perceived as coherent and credible to users of the legal system.

Auer’s acknowledgment of the poorly-theorized nature of bargaining power disparities in the legal context proceeds further to suggesting that bargaining power should be analyzed economically and that legal tools that attempt to redistribute bargaining power within a capitalist system “will at most effectuate ‘palliative redistribution,’ meaning that it will not change the overall distribution of capitalist wealth in more than marginal cases, where it comes at an additional cost to the rule of law.” (P. 23.) Admittedly, I have my own concerns regarding the effectiveness of economic modeling of bargaining power, but Auer’s treatment of the concept and the futility of legal attempts to redistribute bargaining power is an extraordinary insight that makes this article well-worth reading.

  1. See, e.g., Mark L. Movsesian, Rediscovering Williston, 62 Wash. & Lee L. Rev. 207, 209-217 (2005) (arguing that later Legal Realists’ characterization of Samuel Williston’s formalism as abstract and disconnected from real world impacts is inaccurate and ignores the pragmatism, rejection of essentialism, and moderate approach to freedom of contract).
  2. Ocean Accident & Guarantee. Corp. v. Industrial Comm’n of Az., 257 P. 644, 645 (Az. 1927).
  3. See, e.g., Daniel D. Barnhizer, Inequality of Bargaining Power, 76 Colo. L. Rev. 139 (2005); Daniel D. Barnhizer, Bargaining Power in Contract Theory, in Larry A. DiMatteo, Robert A. Prentice, Blake D. Morant & Daniel D. Barnhizer, Visions of Contract Theory: Rationality, Bargaining and Interpretation (2006); Daniel D. Barnhizer, Propertization Metaphors for Bargaining Power and Control of the Self in the Information Age, 54 Cleve. St. L. Rev. 69 (2006); Daniel D. Barnhizer, Bargaining Power in the Shadow of the Law: Commentary on the Contributions of Professors Wright & Engen, Professor Birke, and Joshua Bowers, 91 Marquette L. Rev. 123 (2007); Daniel D. Barnhizer, Context as Power: Defining the Field of Battle for Advantage in Contractual Interactions, 45 Wake Forest L. Rev. 607 (2010); Daniel D. Barnhizer, Escaping Toxic Contracts: How We Have Lost The War on Assent in Wrap Contracts, 44 Southwestern L. Rev. 215 (2015).
Cite as: Daniel Barnhizer, Maybe Odysseus Was a Capitalist?, JOTWELL (February 16, 2024) (reviewing Marietta Auer, Bargaining with Giants and Immortals: Bargaining Power as the Core of Theorizing Inequality, __ L. & Contemp. Probs. __ (forthcoming), available at SSRN (Aug. 28, 2023)), https://contracts.jotwell.com/maybe-odysseus-was-a-capitalist/.

Reforming Bankruptcy to Promote Debtor Agency

Abbye Atkinson, Borrowing and Belonging, 111 Cal. L. Rev. 1369 (2023).

In her beautifully written article, Borrowing and Belonging, Abbye Atkinson argues that, because consumption is central to dignity in American culture, bankruptcy rules should be altered to promote the restoration of debtors’ dignity. At present, she argues, the rules of bankruptcy strip debtors of dignity even as they purport to offer a “fresh start”. (P. 1369.)

In the first part of her article, Professor Atkinson reviews the literature arguing that consumption has a distinctive cultural significance in American life. It is key to full participation in a common way of life, and is perceived as essential to full citizenship. In the next part, Atkinson describes the present bankruptcy regime as requiring an exchange of dignity for relief, a trade that she argues is inconsistent with the idea of consumption-as-dignity that seems to fuel the credit economy to begin with. She points to rules that mandate publicity regarding a debtor’s finances and rules that effectively restrict access to future credit. Finally, she argues for an alternative model of personal bankruptcy that “disentangles relief from ostracism”. (P. 1378.)

Atkinson’s approach is inspired by several normative frameworks, which she seeks to integrate. The concept of capabilities captures for her the idea that access to credit is essential to social functioning in the United States. The idea of aspiration captures how the desire to be a new person, acquire new values, and generally transform oneself can lead one to make choices that appear irrational to others given one’s present circumstances. Finally, the idea of substantive citizenship entails claims of belonging. She brings these ideas together by offering “aspirational agency” as a version of internal capability. The prospect of a normative fusion is promising though this reader will be interested to hear more from Atkinson in the future about how to reconcile potential tension between the socially constructed character of necessity under a capabilities frameworkand the subjective dimension of  aspiration, which turns on the new self that a particular individual chooses to endorse.

Armed with a multi-pronged normative framework, Atkindon argues that debtors require more to fully function in our society than the present regime recognizes. In particular, they need to consume in order to participate in society. This renders the consumption that led debtors to bankruptcy both rational and reasonable. It also implies that a punitive bankruptcy regime is wrong. Personal bankruptcy, she argues, should aim instead to restore aspirational agency. This leads Atkinson to reject certain features of bankruptcy as we know it. Most notably, she would reject requirements that publicize a debtor’s situation and categorical nondischargeability for any category of debt.

Atkinson is persuasive that the centrality of consumption to American culture cuts in favor of more leniency in bankruptcy. My primary worry concerns the effects of rule changes that go well beyond their immediate ex post effect on the aspirational agency of debtors. Depending on the consequences of the policy changes she advocates, one can imagine two other kinds of potential consequences. First, we could see consumer prices rise overall, at least with respect to goods or services commonly purchased on credit. This strikes me as an acceptable consequence from within her normative framework, because it might reduce consumption across the board without compromising any particular group’s capability to participate; indeed, it might lower the threshold of consumption that full citizenship is perceived to require. But a second possibility is that prices will rise, especially the price of credit, for particular groups that are regarded as high-risk borrowers. This effect seems counterproductive under Atkinson’s framework, because it will push groups further out from full social participation. It would also undermine any aspiration to move from one consumption tier to another.

I would be tempted to conceive of the shortfalls in our bankruptcy regime in terms of equality. Liberal egalitarian theories of justice hold that the principle of moral equality constrains our basic economic institutions; the principle requires that people be given the chance to participate fully in our market-based society, in much the way that Atkinson describes. The significance of consumption to full agency and social participation implies a liberal imperative to work out carefully which reforms to bankruptcy will improve personal and social agency over the lifetime of low-income individuals, not just at the moment of bankruptcy for those that file for it.

Cite as: Aditi Bagchi, Reforming Bankruptcy to Promote Debtor Agency, JOTWELL (January 16, 2024) (reviewing Abbye Atkinson, Borrowing and Belonging, 111 Cal. L. Rev. 1369 (2023)), https://contracts.jotwell.com/reforming-bankruptcy-to-promote-debtor-agency/.

Government Contracts, Algorithms, and the Benefits of Trial and Error

Cary Coglianese & Erik Lampmann, Contracting for Algorithmic Accountability, 6 Admin. L. Rev. Accord 175 (2021).

Algorithmic accountability is a pressing contemporary issue. Machine learning algorithms—also known as artificial intelligence (AI)—are used in decision-making by state and federal agencies, as well as in the private sector. The decisional outcomes from AI can be critical to the quality of life of affected people, and yet the rationale for algorithmic decisions is often obscure. Algorithmic accountability is the process of assigning responsibility for the results of decision making assisted by AI. In Contracting for Algorithmic Accountability, Cary Coglianese and Erik Lampmann argue that public procurement—or government contracting—is a tool to promote algorithmic accountability in governance and beyond.

Federal, state, and local agencies use machine learning algorithms to aid in many tasks, from forecasting crime to allocating social services. The algorithms are not always immediately successful, but there is great enthusiasm in developing AI for governmental decision-making due to the potential for efficiency and cost savings in the long run. However, most government entities do not have the expertise or resources to develop machine learning algorithms on their own. They must contract with private parties to create these tools for them through public procurement processes.

Procurement has mechanisms for incorporating compliance with socially important goals that could be used to promote the responsible public sector use of AI tools. For example, interested parties can object to the terms or award of a federal government contract through a formal challenge called a bid protest. The terms of procurement contracts already include environmental and social goals. This has been shown to have the secondary benefit of diffusing social norms about best business practices in the private sector. Similarly, government contract terms could promote compliance with otherwise voluntary standards for the responsible use of AI. Several groups have developed standards for ethical AI that government procurement could incorporate.

Coglianese and Lampmann suggest that government contracts for AI services and tools go further than simply incorporating pre-existing general contracting language. To achieve algorithmic accountability, they provide general suggestions for what AI contracts should incorporate, including substantive privacy and security standards, mandatory audit processes, and transparency safeguards which would ensure the possibility of public evaluation, while limiting contractors’ abilities to invoke trade secrets as a broad shield to avoid scrutiny. Each bidding process is an opportunity to set standards tailored for the particular AI use desired by the government body. Both the government and potential alternate contractors will have the means and incentives to hold AI providers to the terms of the contract, and public transparency will allow lawmakers and the rest of society to learn from government deployment of AI.

There is paralysis around regulatory action on algorithmic accountability. Many argue that governing by broad standards is undesirable, because compliance is expensive for regulated entities when regulatory action is not predictable. But clear, inflexible rules are also said to be unworkable because there is not enough knowledge about individual cases and applications to make clear rules that are not poorly designed or over- or under-inclusive. This leads to the familiar inaction that characterizes modern American regulation of the newly possible.

Coglianese and Lampmann’s proposal offers one way through this impasse. Trial and error in rule development in public law is often derided as a waste of resources. There is both a need to rely on experience to develop rules that reflect an understanding of technology, incorporate legal reasoning, and balance the interests of all stakeholders, but a hesitance to allow any discretion in the rules applied by judges and agencies to particular cases. While further regulatory action is likely needed in the AI accountability space, government procurement can be an important laboratory for developing workable rules promoting algorithmic accountability. This allows the public interest and public dollars to shape AI accountability rules and provide public subsidization of the process of determining how to safely deploy AI in society.

Cite as: Lauren Scholz, Government Contracts, Algorithms, and the Benefits of Trial and Error, JOTWELL (December 4, 2023) (reviewing Cary Coglianese & Erik Lampmann, Contracting for Algorithmic Accountability, 6 Admin. L. Rev. Accord 175 (2021)), https://contracts.jotwell.com/government-contracts-algorithms-and-the-benefits-of-trial-and-error/.

Towards the End of Normative Interpretation of Contracts

David A. Hoffman and Yonathan A. Arbel, Generative Interpretation, 99 N.Y.U L. Rev. __ (forthcoming, 2024); U of Penn L. Sch., Pub. L. Rsch. Paper, available at SSRN (Aug. 1, 2023).

The plain meaning rule is out of favor with contracts academia. There is so little to say about it, nothing to theorize, and even less to test students about. Plain meaning? It’s such an unintelligent concept. Scriptures, poems, literature, love letters—they all have subtle meanings that can be imagined and read between the lines. Why not contracts?

Luckily, California rescued the contract world from that slight. Its courts rejected the plain meaning rule! We too now have a job to do: speculate about the meaning of contracts. California and Foucault told us that there is no such thing as plain meaning of words, and so the meaning of the contract must be teased out not merely from the text but also from the context of the agreement. The so-called contextualist interpretation approach liberated our profession to develop surgical interpretation tools that advance various conceptions of what-the-parties-must-have-truly-intended. Precontractual conversations, relational norms, the parties’ interests and expectations, what not. So much richness beneath the text. Aside from a few dissenters, the contracts professoriate either ignores or deplores the plain meaning rule.

There is only one problem with this state of the art: it is divorced from the state of the law. American courts, by and large, regularly apply the plain meaning rule to interpret contracts. Words, courts strangely think, have meanings, and when common sense is not sufficient to discover that meaning dictionaries and treatises can help.

There is so little “theory” behind the textualist/plain-meaning approach to interpretation that until recently there was no scholarship on it. Against the dozens, maybe hundreds, of articles on how to do contextualist interpretation, and the even more numerous articles on normative interpretation (namely, how to interpret contracts in ways that advances various social values), there were no creative ideas on how to improve the methodology of textualism. A few years ago, Stephen Mouritsen began to fill that void with a terrific article that introduced a method of empirical linguistics—how to choose between several plain meanings. I wrote an earlier Jot on that article and I loyally teach it to my 1Ls. They love it.

Now comes a major new contribution to the budding field of data-driven textualism. It asks not what the parties had intended but rather what the words they chose typically mean. Yonathan Arbel and Dave Hoffman have teamed together to propose a method of “generative interpretation” of contracts, which statistically estimates the meaning of the text with the aid of artificial intelligence models.

For example, does the term “flood”—typically used in insurance contracts to describe an important exclusion—have a plain meaning that refers only to inundations that are naturally caused, or could it also mean humanly caused ones? When courts want to answer this question (as they did, for example, after the Katrina floods), they use dictionaries and canons of textual interpretation. The AI algorithms Arbel & Hoffman use—the Large Language Models (LLMs)—tease out the meaning by looking at other texts that use this term. The algorithm is trained on vast bodies of existing texts to learn complex statistical relationship between words and discover the most common other words and meanings that relate to the contested phrase. It captures both semantic and syntactic relation to other words, along numerous dimensions. When assessing the meaning of a sentence, the LLM algorithm can also determine which word in the sentence sheds more light on its meaning. As result, it offers a big improvement relative to corpus linguistics: the meaning of any word or phrase in a contract is not “stable” but rather changes based on the specific textual context in which it is packaged.

Consider what this means for contract disputes. If a term like “flood” or “chicken” is disputed, the court could open a search prompt similar to ChatGPT, type in the contractual clause and ask which of the contested meanings is more likely. The answer, sometimes given in probabilistic terms, will be instantaneous. No training is necessary, no software needs to be purchased, there is no cost involved. If the contested meanings both appear in dictionaries, the court would have a method to rank them, and a quantitative measure for the likelihood of each. Moreover, terms that are otherwise deemed ambiguous, like the infamous “fair share of profits” in Varney v. Ditmars, could be deciphered by asking the model to rank the parties’ proposed meanings.

The Arbel-Hoffman article is a proof of concept. With AI tools becoming rapidly available for popular use, the LLM models they rely on will be exponentially improved and their uses to interpret contracts will become easy and convenient. This is why I will not bother commenting here on some of the practical issues they gloss over, perhaps too rapidly (e.g., can the method be manipulated by smart lawyers?). Before too long, I imagine, drafters of contracts will use AI tools to make sure in advance that the text they are writing has the meaning they intend.

Will courts follow? Would their opinions refer to AI models instead of, or in addition to, dictionaries, when interpreting text? I sure hope so, but I also recognize that the craft of law is more resistant to automation than many other skills. Law people comfortable with auto-pilots may not be ready for auto-judges. At the same time, textual contract interpretation is one of the more technical, apolitical, no-nonsense tasks within the judicial repertoire. If we want to begin a transformation towards artificial judicial intelligence somewhere, here is an area that seems less threatening to our quixotic notions of courthouse justice.

Cite as: Omri Ben-Shahar, Towards the End of Normative Interpretation of Contracts, JOTWELL (November 2, 2023) (reviewing David A. Hoffman and Yonathan A. Arbel, Generative Interpretation, 99 N.Y.U L. Rev. __ (forthcoming, 2024); U of Penn L. Sch., Pub. L. Rsch. Paper, available at SSRN (Aug. 1, 2023)), https://contracts.jotwell.com/towards-the-end-of-normative-interpretation-of-contracts/.

Excuse 2.0: A Macroeconomic Model of Contract Excuse

Yehonatan Givati, Yotam Kaplan, and Yair Listokin, Excuse 2.0, __ Cornell L. Rev ___ (forthcoming), available at SSRN (June 1, 2023).

Excuse 2.0 is worth a careful read. The article supports contract law’s current treatment of the impossibility, impracticability and frustration doctrines despite the authors’ conclusion that these excuse doctrines are “notoriously vague.” In fact, according to the authors, this is exactly what we want and should expect of law that excuses promisors from their contract obligations in the face of what the authors refer to as systematic risk. Although the authors concede that “[m]ost risks fall on a spectrum between purely idiosyncratic and purely systematic,” (P. 21) the latter risk, the authors explain, affects populations, such as pandemics and wars whereas idiosyncratic risk impacts only individuals, such as the risk of fire to a promisor’s premises. An important thesis of the article is that in systematic risk situations ambiguous excuse law promotes compromise and loss sharing that lessens economic havoc in the long-term, such as bankruptcies.

The authors reason that when promisors cannot perform “through no fault of their own,” (P. 28) in the face of uninsurable risks such as a pandemic, excuse doctrine reduces the costs of breakdown to both parties, neither of which can bear the risk on their own. If the law that determines obligations of the parties in such situations is ambiguous, the authors argue, renegotiation, not lawsuits, is the likely result. “In such a situation, the parties will probably settle, to avoid the uncertainty associated with trial, and the costly process of litigation…[T]he payment they will agree on in their settlement…will reflect the uncertainty of the legal outcome.” (P. 33.)

Another important takeaway from Excuse 2.0 is that lawyer-economists’ superior-risk-bearer analysis of excuse law does not comfortably apply to systematic risk because the superior risk bearer is indeterminate. For example, “[n]either party to a commercial real-estate contract…was better placed to prevent a pandemic-induced lockdown, nor would either party be better placed to prevent a pandemic or a war.” (P. 25.) Nor would a low-cost insurer be identifiable, especially because insurance will not be available in the face of a risk that would “sink” the insurer. (P. 25.) The authors also point out that in a systematic risk situation neither party is in a good position to determine the likelihood of the risk.

A third contribution of Excuse 2.0 involves the authors’ discussion of the contrast between governmental responses to systematic risk and private excuse law. They observe that the government’s stimulus measures, in response to the recent pandemic, suffer from the absence of tailored payments to those in need and result in high inflation. Tailoring requires particular information, leading the authors to conclude that the excuse doctrines “offer a superior risk spreading system.” (P. 24.) Further, “[t]he virtue of the uncertain excuse doctrine is that it facilitates private tailored risk sharing when systematic risks lead to the risk of widespread insolvencies.” (P. 31.)

As with other important articles that develop counter-intuitive theories (for example, ambiguity in the law of excuse is good), Excuse 2.0 includes some debatable assumptions. For example, as support for their thesis that ambiguous excuse doctrine stimulates renegotiation, not litigation, the authors cite as evidence what they call “the Great Contract Renegotiation” of 2020. They assert that resolution of disputes occurred “without much litigation or legislative contractual reformation,” (P. 3) and that the pandemic led to “an almost unprecedented wave of contractual renegotiation.” (P. 3.) Surely, there has been lots of renegotiation, but the reader may rightly fear that the authors’ rhetoric overdoes it and their footnote support for this dramatic conclusion is thin.1

In addition, the authors emphasize the indeterminacy of excuse doctrine so enthusiastically (e.g., “notoriously vague”) that the reader may get the feeling that the authors believe, in contrast, that other contract rules are relatively certain. But doctrine such as material breach, duress, undue influence, modification enforcement, parol evidence rule and interpretation, one can argue, are equally uncertain and are as difficult as excuse law. In short, a reader may wonder about the wisdom of singling out excuse law for an argument in favor of ambiguity and may ponder where lines should be drawn concerning the benefits of clarity or ambiguity in contract law in general.

Some readers also may find unpersuasive the authors’ explanation for why risk sharing by judicial decree is not a helpful solution to the challenges of excuse cases. The authors suggest that risk sharing would complicate the analysis of excuse cases—“‘splitting the baby’ conflicts with excuse and impossibility doctrine as currently understood” (P. 32) —which seems to contradict their preference for indeterminacy in such cases. In addition, the authors assert that loss sharing by judicial decree would diminish beneficial private risk sharing, but they limit this analysis to situations in which a hypothetical sharing rule is 50% of the loss for each party: “[A] 50%/50% sharing rule weakens the private tailoring of risk sharing that is such an attractive quality of the uncertain excuse doctrine.” (P. 32.)

Despite these concerns, Excuse 2.0’s many contributions make the article well worth reading. The article’s assertion that excuse law’s ambiguity contributed to beneficial private loss sharing during the recent pandemic is itself an argument worth pondering. Other reasons for renegotiation surely played a role, such as the cost of litigation, the norms of flexibility and compromise among many business exchange partners, and the desire for successful long-term business relationships. But if the authors’ assertion about the importance of legal ambiguity in systematic risk situations is correct, they offer a valuable message for law reform in this arena: “[A]ttempts to remove ambiguity from excuse doctrine may be misguided.” (P. 7.)

  1. The authors cite one source of data from twenty-four states for the proposition that state court litigation declined by about 39% in 2020. Not clear is whether the data is for all contract litigation or just litigation pertaining to the pandemic’s disruption of contract obligations. In addition, it is not surprising if, as a general matter, litigation fell off in 2020, during the height of the pandemic shutdown The authors also cite one survey of retailers “that indicated that almost 50% received rent abatements during the early pandemic.”
Cite as: Robert Hillman, Excuse 2.0: A Macroeconomic Model of Contract Excuse, JOTWELL (October 5, 2023) (reviewing Yehonatan Givati, Yotam Kaplan, and Yair Listokin, Excuse 2.0, __ Cornell L. Rev ___ (forthcoming), available at SSRN (June 1, 2023)), https://contracts.jotwell.com/excuse-2-0-a-macroeconomic-model-of-contract-excuse/.

Where’s the Harm?

One would be hard pressed to find a law school graduate in the past half century who was not aware of the Williams v. Walker-Thomas Furniture Co. case. Many law professors consider the case, which challenges the enforceability of a cross-collateralization clause in an installment sales contract, to be a classic for its contribution to the doctrine of unconscionability. However, this elevation to “classic” status has not been without controversy and a great deal of commentary. Some scholars have questioned the continuation of teaching the case in first year Contracts due to concerns about the racial and socioeconomic issues imbedded in the case. They fear that the case perpetuates harmful stereotypes about people of color and those living in economically disadvantaged communities. Others claim that the case lays the foundation for legal remedies that will ultimately harm certain communities rather than help them. In his thought-provoking article The Bitter Ironies of Williams v. Walker-Thomas Furniture Co. in the First Year Law School Curriculum, Professor Duncan Kennedy convincingly counters this claim and asserts the importance of the case’s contribution to the unconscionability defense, which he argues ultimately benefits rather than harms people living in certain communities, specifically those living in poor Black neighborhoods.

Professor Kennedy’s article is “part of a larger project exploring the economics of housing and credit in poor Black neighborhoods” in which he “defends the range of legal initiatives that legal services lawyers and clinicians, with progressive lawyers and academic allies, have undertaken on behalf of poor Black neighborhoods against the perennial neoliberal accusation that they ‘hurt the people they are supposed to help.’” He begins his piece by discussing how professors and casebooks present and examine the case, which often involves querying whether banning the challenged clause would hurt or help poor buyers or borrowers. The ensuing discussion often includes arguments regarding the possibility of increased risk and costs for the seller that will be passed on to consumers resulting in higher sales prices or increased interest rates that will prevent some buyers from participating in the market. Professor Kennedy notes that some argue that this outcome is “especially unfortunate” for buyers like Ms. Williams who are poor and demonstrates “the quintessential case for the idea that well-meaning humanitarian policy initiatives are chronically counterproductive as well as grossly paternalist.”

Professor Kennedy finds it ironic that although Judge Skelly Wright does not mention Ms. Williams’s race or the fact that she lives in a poor Black neighborhood in his opinion, Williams is often the only case or one of a few involving a poor, Black litigant that first year law students will encounter in their Contracts course, unless their professor supplements the casebook with additional materials. According to Professor Kennedy, “[r]ace will be salient in the way students, whether or not of color, experience the case as a story about racial reality.” This reality will be informed by students’ lived experiences and the various narratives about Black people and communities to which they have been exposed. Professor Kennedy mentions that one such narrative that operates in the case stems from conservative politicians’ efforts to characterize Black mothers utilizing public assistance as irresponsible “welfare queens.” He also notes that professors “oriented to the law and economics critique of the decision” perpetuate the narrative “that we would expect merchants selling household goods on credit to charge high prices with bad terms because of, and only because of, the high default rates of the Black poor” despite empirical evidence to the contrary. Given the intersection of race, class, and consumer protection that permeates the case, Professor Kennedy argues that Williams provides an important vehicle by which to challenge these narratives and the “hurt the people you’re trying to help” argument that flows from them.

He finds it “striking that liberal defenders of the use of unconscionability doctrine to police contract terms, and of the outcome in Williams in particular, only rarely…challenge [the “hurting the people” argument] directly.” He highlights the scholarship of Professors Bruce Ackerman, Russell Korobkin, Jean Sternlight, and Elizabeth Jensen as examples of “literature taking up the question of how much, if any, of a seller’s increased cost of compliance with a new duty will be passed along, how much he will reduce sales, and how his response to the new duty will affect consumer welfare.” Professor Kennedy also cites Professor Louis Michael Seidman’s reflections on Judge Wright’s legacy as an important recognition of the “contested and complicated” economics behind assertions about the market and consumer welfare impact of Judge Wright’s regulatory interventions. Notwithstanding whether judicial or legislative interventions during the decade and a half that followed the Williams case increased the credit supply for consumers, Professor Kennedy asserts that they likely “improved the welfare of borrowers in poor Black neighborhoods. And did it without raising the price of credit or reducing the supply at all, or by a very little. That they improved the credit supply without increasing it does not detract from the beauty of what they did.”

According to Professor Kennedy, law professors teaching Williams use “conventional neo-classical economic analysis” to examine the narrow question of “whether it is likely or even very likely that a jurisdiction that banned cross-collateralization clauses, in the contracts of poor buyers in typical poor Black neighborhoods made them better off.” He relies on arguments regarding information asymmetry, lack of a competitive market in relevant D.C. neighborhoods for household goods, and unique market conditions that existed at the time of the case to effectively challenge assumptions that underlie this conventional analysis. Regarding the D.C. market conditions, Professor Kennedy provides an enlightening and informative account of the stark realities of racially segregated housing, concentrated poverty, lack of educational opportunities, and lack of access to mainstream credit that Ms. Williams and similarly situated buyers faced at the time and still do today.

Of particular importance to Professor Kennedy’s claim that the decision in Williams may actually benefit rather than harm poor Black communities is his discussion of the Walker-Thomas store being part of an oligopolistic financial market whereby a small number of sellers and lenders “typically compete not on price but on factors like location, branding, advertising, discounts, and sales. … When costs increase because of a new compulsory term, the seller will raise his price to compensate. … A quasi-captive market like the one in Williams allows larger increases above cost because it is difficult for customers to desert to stores outside the neighborhood.”

Professor Kennedy also details what he calls “low road” commercial practices by which sellers in poor Black neighborhoods sold goods on installment credit. Such practices included concentrating their sales on credit to poor Black buyers/borrowers, using cross-collateralization clauses to have a robust supply of repossessed goods for reselling, setting purchase prices by one-on-one in store bargaining with customers rather than set sticker prices, and engaging in door-to-door sales that resulted in installment agreements with missing purchase prices that the seller supplied at a later time.

Professor Kennedy theorizes that this business model that maximized buyers’ reservation price (the highest price they were willing to pay) and the price they were financially able to pay meant that it was “implausible that sellers could raise prices much, if at all, in response to the banning of the [cross-collateralization] clause. Sellers almost certainly had to ‘eat the cost,’ or the vast majority of it, because they had already exhausted buyer willingness to pay for the underlying good.” Therefore, according to Professor Kennedy, banning the clause as contemplated in Williams would not have “hurt the people you’re trying to help,” as some contend, but rather it would have provided a useful tool by which to protect members of poor Black neighborhoods against the psychological and material costs associated with blanket repossession.

As someone who has taught the Williams case for over a decade, I found Professor Kennedy’s article to be an important contribution to the existing literature about the case. He has provided a useful pedagogical tool to help professors reexamine our approach to analyzing and discussing the case and its possible implications. He has also reminded us that poor minority communities continue to be subjected to abusive and exploitative credit practices, so there remains more to do to provide greater protections in hopes of bringing about greater racial and economic equity.

Cite as: Eboni Nelson, Where’s the Harm?, JOTWELL (September 7, 2023) (reviewing Duncan Kennedy, The Bitter Ironies of Williams v. Walker-Thomas Furniture Co. in the First Year Law School Curriculum, 71 Buff. Law Rev. 225 (2023)), https://contracts.jotwell.com/wheres-the-harm/.

Why Does Status Matter in Contract?

Kaiponanea T. Matsumura, Unifying Status and Contract, 56 U.C. Davis L. Rev. 1571 (2023).

One might be tempted to think that status-based relationships were displaced by contract in modern societies, in the way that Henry Maine suggested over fifty years ago. However, it is now also understood that many specific kinds of relationships are governed by their own rules, even if some elements of voluntary agreement are present. For example, even if one chooses to get married and to marry a particular person, many of the surrounding rules are outside of the parties’ control. Employers and employees choose not only their contractual partners but also most of the critical terms of the employment relationship; but the state imposes a variety of mandatory terms and prohibits others. In these contexts, status-based rules sharply delimit the application of general contract rules. We have paid relatively less attention to how status informs the affirmative application of general contract law, even though there are a variety of doctrines internal to contract that apply “special rules” to tenants, consumers, insured, franchisees, and many others.

In his insightful recent article, Unifying Status and Contract, Kaiponanea Matsumura corrects this neglect. He shows that contract law is responsive to vulnerability in a variety of specific kinds of relationships, and not just ones that we associate with separate bodies of law. He offers illustrative detail on three kinds of relationships: cohabiting partners, contractors and subcontractors, and online service retailers and their customers. He shows how courts balance traditional contract-law considerations of morality and efficiency differently in each context. The most important facts about each relationship that inform special treatment are those that speak to the power balance between the parties.

Matsumura’s discussion of status and its infusion into contract law raises further questions about what motivates the infusion of status into legal reasoning. Why does status matter to contract? Is it the package of facts, including power imbalances, that status implies about the parties in a particular case, in which case it is unsurprising that judges would sometimes take advantage of the information that a familiar status supplies? Or does status matter instead because of the social ramifications of a pattern of contracting across many similarly situated parties, in which case judges accounting for status are responding to policy imperatives, especially distributive principles? (I put aside for now whether such distributive principles are properly regarded as internal or external to contract law.) Another way of getting at the distinction in purpose is to ask, if status matters because it identifies vulnerability, whose vulnerability matters? Is it the vulnerability of one of the parties in the contract, whose situation is illuminated by reference to her status, or the vulnerability of people like her, who will benefit from favorable treatment of their representative party?

There is no need to choose, perhaps. But it would be good to know what we are doing, because it speaks to how much we want to know and about whom. That is, if status sheds light on parties’ claims, we might want to know more than the relationship-type that frames a particular agreement; we will want to know if the contractual relation tracks the power dynamic we associate with relationships of that type, at least where such information is readily available. If status is important for surfacing the distributive consequences of how contract rules are applied in a given context, then we might not care about status in the context of contracts between socially privileged groups, even if those groups have an imbalance of power between them.

Matsumura’s invocation of recent “law and political economy” scholarship suggests that he is interested in the distributive dimensions of patterned relationships. However, he also argues, and indeed, shows that the details of relationships matter because they reveal power imbalances between specific contracting parties. Does status matter only when those power imbalances repeat themselves en masse? Matsumura points out that there is usually nothing mysterious about how patterns of power work out in different kinds of relationships. But while it might not be mysterious, it seems likely to be inconsistent. For example, the power dynamic we observe between cohabiting partners might turn on quite a few facts separate from the fact of their cohabitation. The power dynamic between general and subcontractors might depend on features of the particular market in which they are operating, which might vary by geography and across an economic cycle. The power dynamic between online service retailers and consumers also varies, but in luxury markets, do the informational asymmetries that consumers face warrant the same protection as in lower-end retail markets?

Matsumura offers many insights about the shortfalls and dangers of our present thinking about the relationships between status and contract. He is persuasive that status-based rules are not an external constraint on the boundaries of contract but animate the application of contract law in many areas, and rightly so. He also invites us to continue to think about why status matters—and therefore—when it matters, and what other kinds of facts judges should take into account or ignore about contractual relationships.

Cite as: Aditi Bagchi, Why Does Status Matter in Contract?, JOTWELL (July 28, 2023) (reviewing Kaiponanea T. Matsumura, Unifying Status and Contract, 56 U.C. Davis L. Rev. 1571 (2023)), https://contracts.jotwell.com/why-does-status-matter-in-contract/.

Contract as a Tool of Systemic Racism & (Maybe) Reparations

Marissa Jackson Sow, Whiteness as Contract, 78 Wash. & Lee L. Rev. 1803 (2022).

Marissa Jackson Sow’s brilliant article Whiteness as Contract pushes contracts scholars and critical race theorists to think about old topics in new ways by revealing connections between seemingly separate areas. It builds on Cheryl Harris’ Whiteness as Property, 106 Harv. L. Rev. 1709 (1993), to show the deep synergy between contract and white supremacy the way that Harris connected the private law of property to public law regulating racial subordination.  Like Harris, Jackson Sow marshals high theory – here social contract theory — to explain persistent structural, economic, and physical harms to African Americans and in doing so prescribes a fix to those injustices.  Jackson Sow’s “whiteness as contract” theory could and should shape many if not most future scholars’ writing about law and inequality.

We’re on the Contracts Jotwell page, so I focus on Jackson Sow’s Washington & Lee Law Review article.  But you may already know about the breadth and ambition of Jackson Sow’s theory from the wide range of contexts to which she’s applied it: police brutality in Protect and Serve, 110 Cal. L. Rev. 743 (2022); enfranchisement in  (Re)Building the Master’s House: Dismantling America’s Colonial Politics of Extraction and Exclusion, 121 Mich. L Rev. 113 (2023); and to defend critical race theory in Whiteness as Guilt: Attacking Critical Race Theory to Redeem the Racial Contract, 69 UCLA L. Rev. Disc. 20 (2022).

Together these articles offer the best answer I have encountered to persistent racial injustices.  In a legal and social environment that trumpets its commitments to equal treatment, why do police continue to harass and brutalize African Americans, schools to shunt black youth down the prison pipeline, health care providers to deprive black patients of equal treatment, lenders to exploit black borrowers, to name just a few racial injustices?  Because, Jackson Sow explains, our core commitment is to white supremacy, not equality.  She asserts that the U.S’s “primary social contract – the U.S. Constitution – established the centrality of property ownership, and necessarily the right of contract” and formally excluded Black people from these rights via provisions such as the Three-Fifths Clause. (1820)  In this view post-Civil War Reconstruction reforms such as the 13th, 14th & 15th Amendments and derivative legislation failed to “revoke the racist social contract.” (1821) Even after the reforms of the mid-20th century civil rights movement, racial injustices continue because, she explains, “[t]he signatories to the white supremacist racial contract viewed antiracist legal reforms as breaches to the contract and always sought to remedy those breaches via legal, illegal, and extralegal means.” (1822)

In other words, racial subordination is the rule, rather than an exceptional departure from a norm of race equality.  Whiteness as Contract lays the theoretical foundation to reveal this truth and suggest interventions to remedy this deep defect in our justice system.  The first of her two theoretical touchstones – Cheryl Harris’ notion of whiteness as property – is familiar to law professors.  But one of the major contributions of Whiteness as Contract is Jackson Sow’s dexterous use of philosopher Charles Mills’ book The Racial Contract (1997) to expose connective tissue between the metaphysical social contract and commercial contracts.

Social contract theory à la Rawls imagines a primordial exchange in which our distant ancestors swapped the freedom enjoyed in a mythical state of nature for the so-called “civil freedom” of civilized society.  In this view people chose in their self-interest to relinquish some freedoms to the state for their own good and the community’s greater good. Government – and thus law — is for everyone and by everyone.  Mills critiques the idealism embedded in this model, in particular Rawls’ imagined “veil of ignorance” that prevents hypothetical designers of law and society from knowing their race, sex, level of wealth, or other social and physical characteristics.  According to this widely used heuristic, that blindness allows us to imagine and create an ideal society in which legal and social rules would not allow – let alone facilitate — any one group to systemically dominate the others. Mills points out that Rawls’ forward‑looking approach conveniently ignores past harms and baked-in hierarchies that continue to distribute wealth and power to white men and away from white women and people of color.

A growing number of contracts scholars such as Mehrsa Baradaran likewise situate systemic racism as a breach of the social contract, and propose reforms as necessary remedies to that breach.1 Those proposals seek to reform what Mills calls “the Racial Contract” to make it live up to its liberal promise.  Yet often legal scholars elide over the difficult matter of connecting the terms of the idealized social contract and the actual Racial Contract to commercial contracts.  Whiteness as Contract fills this gap by clearly identifying the social contract terms that the Racial Contract breaches, thus creating a framework for doctrinal reforms to repair that harm.

Whiteness as Contract begins by detailing  white vigilantes’ near-lynching of a black man who supposedly trespassing on private land with some white friends to watch a lunar eclipse, and water shutoffs in Detroit because the city charged (largely Black) residents more for the water in the vast reservoir under the city than whites who abandoned the city for suburbs.  Jackson Sow marshals “contract theory to explain why Black people’s possession of property – including their rights to home ownership and life-sustaining utilities, their rights to personal physical integrity, . . . is regularly met with brutal resistance.” (1810) Her “theory of personhood “maps ways that Black people are stripped of contractual capacity and the rights to political, commercial, or personal proprietorship” (1810).

Of course, formal law has long enabled Blacks to exercise economic citizenship.  But Jackson Sow looks behind the surface of black letter to explain how and why “proximity to whiteness comes with greater access to rights,” and “proximity to Blackness comes with greater exclusion from them.” (1812)  Whiteness as Property argues that these relentless abuses persist because “whiteness is a product of contracting – both commercial and social – that creates, and continues to negotiate, an invisible common law that preserves control over property, capital, power, and contracting authority for those raced as white.” (1810-1811)  In short,  “the terms of whiteness are written in an ‘invisible ink’” to maintain “a sociopolitical order that places Black and Indigenous people outside of the law, outside of personhood, and – as necessary – outside of property, via displacement, dispossession, disenfranchisement, or death.” (1811)

Space constraints prevent detailed analysis of Jackson Sow’s convincing link between social contract theory and persistent racial bias in actual, commercial contracts.  Her case study of the Detroit water crisis reveals that largely-black Detroit residents subsidize the water delivery to the more monied and more white suburban residents.  (1855).  Another contractual injustice that contributed to the sky-high Detroit foreclosure rates of 25% between 2011 and 2015 involved the city inflating Detroit real property taxes, tacking on inflated water bills to the taxes, and having those debts run with the property so that new owners enter already behind in their payments (1864-1865).   She contends that formal rules such as property ownership get treated as mere tenancy under the Racial Contract, because “[w]hiteness is only valuable property when it is exclusive and exclusionary,” leaving African Americans “dependent upon the whims of the landlords” and white citizens “exercising their lay policing authority.”  (1868) Think of  New Yorker Amy Cooper calling the police on black bird watcher Christian Cooper in Central Park for the “crime” of telling Ms. Cooper to leash her dog.

Whiteness as Contract concludes that contract theory helpfully locates “the motivations of government to prey on Black and Indigenous people, extracting resources they enjoy, possess, and manage, and expropriating them for the benefit of white individuals, the state, and corporations.”  (1881)  Once we see this expropriation as a breach, the question of damages arises.  Jackson Sow supports “antiracist racial contracting” (1833) in the form of, for example, supporting Black-owned and Indigenous-owned businesses (1844), ending extractive practices such as the Detroit water policies by charging affordable, flat rates for all regional consumers, and providing reparations for Detroit and Flint victims of water policies with tax credits to recognize and offset some of those losses. (1886)

Finally, Jackson Sow calls on her white readers to “recognize their individual and collective guilt” as either “signatories to or beneficiaries of an ongoing series of negotiations over the benefits and spoils of white supremacy.” (1888)  It’s a perfect end to an extraordinary scholarly contribution that addresses a seemingly intractable social and legal problem, beautifully highlighting the role of high theory such as social contract analysis to our obligations to one another in the everyday matters of mortgages, grocery bills, student loans, and other contracts that shape our lives and life chances.


Editor’s note: For a previous review that discusses this article see Ezra Young, Trumpism and Critical Contract Theory, JOTWELL (Dec. 7, 2021).

  1. Mehrsa Baradaran, The Color of Money 281-283 (2017).  For a full discussion of social contract theory in American legal doctrine, see Anita L. Allen, Social Contract Theory in American Case Law, 51 Fla. L. Rev. 1 (1999)
Cite as: Martha Ertman, Contract as a Tool of Systemic Racism & (Maybe) Reparations, JOTWELL (June 28, 2023) (reviewing Marissa Jackson Sow, Whiteness as Contract, 78 Wash. & Lee L. Rev. 1803 (2022)), https://contracts.jotwell.com/contract-as-a-tool-of-systemic-racism-maybe-reparations/.

What Does Sex Have to do with Contract?

Albertina Antognini & Susan Frelich Appleton, Sexual Agreements, 99 Wash. L. Rev. 1807 (2022).

This thought-provoking article analyzes the interaction between contract and sex. Seemingly they belong to two utterly different and separate worlds, with no connection between the two. As the authors show, the conventional wisdom is that a contract for sex is unenforceable, whether the parties are married or not. In the case of unmarried couples, the courts refuse to enforce sex for property contracts since that would validate prostitution. Contracts for illicit sexual services are void for violating public policy. In the case of married couples, the courts would not allow the parties to alter the marriage contract written by the state. Sex is essential to marriage, and as the loss of consortium claim proves, sex also has economic value in marriage. This is sex exceptionalism, which means the state prevents the distribution the parties agreed upon in their contract whether in marriage or outside of marriage. Moreover, the authors claim that privileging marriage–and not prostitution–is the reason the courts invalidate non-marital sexual agreements and maintain the marriage-cohabitation hierarchy.

However, the authors claim that in fact the law governing sexual agreements is more complex, and they offer a nuanced description of the law’s treatment of cases where sex is part of the contract. Drawing from paid gestational surrogacy, parentage agreements, surrogate partner therapy and adult entertainment employment as examples they show that the law recognizes these sexual arrangements as legal contracts. Moreover, rape law is based on consent, which means the distinction between lawful and unlawful sex is constructed in a contractual manner. As these examples demonstrate sex and contract are not separate but they coexist and converge.

The article concludes by discussing the benefits of contractual approach to sex. Though it has some disadvantages (such as commodification, perpetuating gender inequalities and maintaining gender biases, and the limited notion of contractual consent) the authors conclude that sexual agreements should be enforceable.

This fascinating article on sexual agreements raises questions about the entanglement of sex, marriage, and contract, as well as profound questions regarding each of these concepts separately.

First, the article questions, What sex is all about? Is it a commodity of economic value? Is it emotional (even prostitution serves emotional, and not only sexual, needs)? Is it part of marriage? Is it separate from other aspects of marriage? Is it part of any loving relationship whether marital or non-marital, and whether between same-sex couples or different-sex couples? It also challenges how sex is gendered in a patriarchal society, and how we might envision what sex would be in a utopian egalitarian world.

Second and relatedly the article questions, What is marriage all about? How is it different from a non-marital committed relationship? How is it different from prostitution? Is it a public institution governed by state regulations or a private institution governed by the parties’ agreement? Is it a status or a contract? And it also challenges how marriage–like sex–is gendered in a patriarchal society, and how we might envision what egalitarian marriage would be like free from gender roles.

Lastly, the article questions, What is contract all about? Is contract restricted to the market and to commercial agreements? Is it applicable to the family? Is it an economic tool to enhance the parties’ welfare or is it about relations? How should the law set the boundaries of contract law? What is included in the world of contract and what is excluded from it? Is consent a workable basis for contract? Is there a difference between consent to sex and consent to contract? What public policy should invalidate contracts? And it also challenges the role of the courts in enforcing contracts, policing property distribution, and maintaining social institutions like marriage.

There is a rich and diverse literature on contracts between family members, challenging the separation between the market and the family. This article takes this issue a step further by focusing on sexual agreements, making an immense contribution to this scholarship. It questions how contract law treats sexual agreements and sexual distribution. It also questions how contract law should be revised in order to enforce sexual agreements and to allocate sex in a just and egalitarian manner.

Cite as: Orit Gan, What Does Sex Have to do with Contract?, JOTWELL (May 29, 2023) (reviewing Albertina Antognini & Susan Frelich Appleton, Sexual Agreements, 99 Wash. L. Rev. 1807 (2022)), https://contracts.jotwell.com/what-does-sex-have-to-do-with-contract/.