Cathy Hwang, Deal Momentum
, 65 UCLA L. Rev.
(forthcoming, 2018), available at SSRN
Cathy Hwang’s article Deal Momentum offers empirical evidence to support a new view of preliminary agreements that could reshape the way we think about these hybrids between contract and non-contract. Her data – interviews with deal lawyers and a review of practitioner literature – challenge the conventional wisdom that businesspeople in large mergers and acquisitions hire counsel to draft memoranda of understanding (“MOU”), letters of intent (“LOI”), or term sheets to resolve either deal uncertainty or deal complexity. That view coheres with the standard statement in a LOI – often on every page – that the parties do not intend it legally bind them on substantive provisions such as price. Yet Hwang’s interviews with corporate counsel, her review of practitioner literature and case law suggest that most business people resolve uncertainties and complexities before entering a LOI, not afterwards.
Hwang solves this puzzle of why parties pay counsel to draft term sheets that make substantive terms non-binding when in fact the parties usually intend to – and do — go ahead with the deal once they create a LOI. She concludes that preliminary agreements instead serve as “signposts” that “lend form and formality to an otherwise unstructured phase of the negotiation process.” (P. 37.) She dubs this tipping point “stickiness,” meaning the point when the parties come to believe that the deal will stick.
Deal Momentum, like the work of Robert Ellickson and Lisa Bernstein, demonstrates the power of norms – instead of or in addition to law – to shape relationships. It suggests that law might not be so important to business people as legal scholars assume. But unlike the ranchers, farmers, and merchants in diamonds and cotton, the parties to M&A deals generally are not members of a tight-knit community.
Hwang interviewed twelve deal lawyers with years of experience in private M&A deals at firms in New York, Silicon Valley, Chicago, and Houston, as well as in-house counsel, she reports that the core terms of a deal don’t change much between the LOI and the final agreement and closing. (P. 36.) Deal lawyers, bankers, and business people see the “real work” of the deal differently, based on their role:
From a deal lawyer’s perspective, then, the real work of the deal begins after the preliminary agreement. From the perspective of bankers and business people, however, the deal is finalized in broad strokes at the preliminary agreement stage. This explains why preliminary agreement terms remain largely unchanged after the agreement’s signing – they are business terms that are negotiated by bankers and businesspeople, who have already completed the bulk of their relevant diligence prior to the agreement’s signing. (P. 36.)
Why, then, would a business spend the time and money to negotiate a non-binding agreement, when they could skip right to the stage of finalizing the agreement?
Following Fuller’s three functions served by formalities like writing requirements under the statute of frauds – evidentiary, cautionary, and channeling – Hwang sees preliminary agreements as providing a vehicle for parties to
signal to each other and attach moral suasion to their non-binding agreement . . . [they] can organize their early collaboration, and introduce lawyers, who act as a set of reputational gatekeepers, to help them further solidify their certainty in the deal.” (P. 38.)
The moral suasion is particularly surprising, since the parties to these M&A deals are not repeat-players with one another. Accordingly, her subjects report that walking away from a LOI generally does not harm a party’s reputation. Yet they also say they care about “their word,” and having the reputation as an “integrity player. (P. 39.) Hwang surmises that the multi-stage nature of big deals creates an incentive to induce trust in the other side. As one subject put it, parties want to show commitment short of legal obligation: “You go on dates, . . . but that doesn’t mean you’re getting married. But you give gifts sometimes. It means some level of commitment.” (P. 40.)
LOIs also signal organization. One deal lawyer analogized the attorney’s role to the 1980s TV ads for Reese’s peanut butter cups:
Too many times the business people come and they think they have a great idea. Like, I’m going to put my chocolate in your peanut butter. You have to sit back and be like, that’s great, but who’s going to pay for the packaging? The marketing? How about employees”? [A term sheet] helps both sides knock out the material terms and figure out if there’s a skeleton to get the deal done. (P. 40.)
Contrary to the reputation of lawyers as deal-killers, this story – offered by a deal lawyer, of course – shows value that transactional lawyers can bring.
But most interesting for law professors is the role of attorneys as gatekeepers. Unlike the parties, the attorneys are repeat players with one another. Lawyers at the elite firms that structure M&A deals encounter one another repeatedly in different transactions, so they have an incentive to keep their word, and thus function as “reputational intermediaries” that signal to parties, bankers, and regulators that attorneys are on task as gatekeepers of legitimacy, screening out legal flaws and verifying compliance with regulations and procedures. In other words, bringing in the lawyers is a way that the parties tell one another and third parties that they mean business.
Signaling through exchanges on the edge of law shows up in areas other than M&A deals. A couple gets engaged when they have found out enough about one another to conclude that they’re sufficiently congenial to make a lifelong commitment. In my book Love’s Promises, I dub these not-legally-binding exchanges as “deals” that support relationships. Combining that approach with the idea of deal momentum, the engagement ring signals one party’s commitment to provide of financial stability, as well as respectability via the public announcement of that exchange. Moreover, the trouble a proposer takes to pop the question in a dramatic or emotional way implicitly promises years of sharing stories about how that family came to be, a norm that could support them through bad times and give them an additional reason to be glad of their merger when things are going well.
The data compiled in Deal Momentum shed light on why parties enter both personal and corporate agreements that are not binding, thus mapping the shadow of the law in which bargaining occurs as well as lawyers’ roles. Future scholars may well suggest another term to describe the stage of a deal’s life when a LOI is merited. Hwang’s term “sticky” coheres with her main point that a term sheet signals the stage in a deal when the parties switch from “why should we enter this deal?” to “why not?,” a switch from a “no” default to a “yes” default. The “yes” becomes a sticky default at that moment. Yet stickiness also implies stasis, not movement. The term “traction” may better capture Hwang’s observation that a LOI works as a green light ushering the parties toward completing the transaction.
While disclosure has been the preferred regulatory tool to ameliorate problems arising from imperfect information, it often fails. In particular, everyone is familiar with the problems associated with not reading fine print: some blissfully uninformed consumers later regret a transaction once they discover hidden charges or attributes described in the unread contract. Formal research confirms that few consumers pay attention to fine print and that disclosures are poorly designed and too abundant to be effective.
The promise of mandatory rules is to avoid these problems. If sensibly drafted, they can rescue consumers from the perils of their own inattention or laziness. Take landlord-tenant laws. In most states, the warranty of habitability and other rules afford tenants a host of legal rights, such as the right to retain payment of rent if the landlord does not deliver the property in livable conditions or fails to keep appliances functional.
To assert their legal rights, however, tenants must first know them. A natural first place to find this out is the lease. But what if the lease disclaims the benefits mandatory rules intend to confer? Then, ignorance of law replaces ignorance of contract terms. Meirav Furth-Matzkin addresses this important yet little-discussed problem in her article. The paper is comprised of two studies. The first is a comprehensive analysis of the standard terms that govern landlord-tenant lease agreements in Massachusetts. The second is a survey of Massachusetts tenants.
In the first study, Furth-Matzkin analyzes a sample of 70 residential lease agreements from landlords, agents, and tenants, which were mostly students. To her surprise, she finds that most leases include non-enforceable terms. She writes that “[a] total of fifty-one leases, constituting 73 percent of the sample, included at least one unenforceable clause, and sixty-five leases, constituting 93 percent of the sample, included at least one misleading clause. Forty-seven leases, or 67 percent, including both unenforceable and misleading terms, and all of the leases in the sample failed to disclose at least nineteen of the possible twenty-six provisions concerning tenants’ rights and remedies and landlords’ duties and liabilities.”
These are not minor provisions. About one-third of the unenforceable terms involved rights afforded to tenants under the warranty of habitability (i.e., terms relating to maintenance and repair), and the same proportion of landlords sought to disclaim the implied warranty of habitability altogether. The problem is that these rights cannot be waived: Massachusetts law holds the landlord responsible for necessary maintenance and repairs. The tenant can do such repairs herself and deduct the cost from upcoming rental payments. The lease provisions have it backwards. They state that necessary maintenance and repairs are the tenant’s responsibility and landlords may charge tenants any repair costs.
It should hardly be surprising that whenever the law does not require landlords to disclose pro-tenant rights, landlords don’t always volunteer to disclose them in their leases. Yet, when the law mandates such disclosures, about half of the leases in the sample fail to comply. For example, over 80 percent of the leases that required advanced deposits failed to notify tenants that the landlord was required to pay interest on such deposits at the end of the lease. Leases also failed to inform tenants of their rights to cure breaches that could result in eviction. Individual landlords were more likely to include these clauses than the commercial ones. The tenants in non-commercial transactions may be less sophisticated, or the landlords themselves may not be aware of the law and view their leases as quite fair, but there is a failure of mandatory disclosure either way.
Of course, none of this would matter if the contracts were not read or otherwise a starting point for disputes. The second study, a survey of 279 tenants in Massachusetts (obtained via Amazon.com’s Mechanical Turk), reveals that most respondents read their lease at some point during their lease agreement and their purpose is often to inform themselves of their rights under the lease. Most renters had experienced at least one issue with their landlord, and over 90 percent had looked to their lease to assess their rights and responsibilities. Most concerns related to repairs and a desire for an earlier termination of the lease. In contrast, only a handful of respondents sought the advice of a lawyer (perhaps because the issue was especially important) or even checked the Web or consulted with friends or family to determine their rights. Indeed, almost half of these renters consulted only the lease to learn about their rights. It shouldn’t be surprising, then, that only three percent threatened legal action against the landlord for failing to comply with the law regardless of the lease, and another small percentage reported reaching an outcome different than the one stipulated by the lease.
Much has been said about the perils of disclosure regulation in consumer markets. The findings of this paper suggest that absent adequate monitoring and enforcement mechanisms, disclosure regulation might fail because sellers might not include mandatory disclosures in their contracts. Indeed, even substantive regulation might not have its intended effect because sellers are misinforming consumers about the law through their standard form contracts, knowingly or not, by including unenforceable clauses. The findings highlight the importance of enforcement and monitoring mechanisms, as well as the effects of inclusion of unenforceable terms. More generally, the analysis and findings contribute to the growing empirical literature analyzing the content of standard form contracts.
Who is best suited to police unfair terms—the market, the judiciary, or the legislature? Williams vs. Walker-Thomas Furniture has long been offered as a cautionary tale, but in her 2014 article, legal historian Anne Fleming takes on the standard narrative of judicial overreach and recasts the relationships among institutional actors in a reform movement.
In 1965, Judge Skelly Wright ruled that Ora Lee Williams’s contract to pay for furniture on a pro rata installment plan was subject to review for unconscionability—a moment of judicial activism that was later blamed for the decline and stagnation of the doctrine of unconscionability. Fleming pushes back against the standard narrative that Williams created a backlash against Wright’s ‘law of the poor’ – according to that simplistic story, “Judges ended up hurting the very people they were trying to help. In the face of incisive criticism, judicial enthusiasm for the doctrine of unconscionability quickly faded.” (Pp. 1387-1388.) Fleming’s argument reframes the Williams decision within a broader context of judicial, legislative, and popular pressure, tracing the revival of unconscionability back to the Uniform Commercial Code, enacted in Washington, D.C. in 1963. In the Williams case, Judge Skelly Wright announced that the UCC’s unconscionability provision in 2-302 was “declaratory of the common law” and ordered the trial court to apply the doctrine on remand. Critics have characterized the Williams case as a short-lived moment of “judicial enthusiasm” soon replaced by more effective legislative action. Fleming argues that consumer protective legislation was enacted not to replace judicial review of unfair terms, but to complement it. The Williams transaction was of course at the center of the litigation with Walker-Thomas furniture, but her situation was also repeatedly invoked in consumer credit policymaking deliberations. “[T]he Williams litigation brought together a coalition of reformers, who pressured Congress to adopt a new set of rules for policing installment sales.” (P. 1438.)
More than fifty years after Williams vs. Walker-Thomas Furniture, the law of unread consumer contracts is back in the spotlight. The justification for the ALI’s new Restatement project on Consumer Contracts would surely resonate with Judge Wright:
On one side stands a well-informed and counseled business party, entering numerous identical transactions, with the tools and sophistication to understand and draft detailed legal terms and design practices that serve its commercial goals. On the other side stand consumers who are informed only about some aspects of the transaction…
Indeed, Fleming’s painstaking account shows Ora Lee Williams in a dilemma that will be highly familiar for the contemporary reader: Was Williams supposed to read her contract or not? Salesmen “would fold over the contract just before presenting it to Williams with the signature line visible” and tell her to “just sign” her name. (P. 1395.) The words of the contract, hidden by the fold, began with the all-caps exhortation to “READ CONTRACT BEFORE SIGNING.” (P. 1439.) When questioned about the pro rata term in court, she finally grew frustrated and said, “You are asking me about reading things that I never had to read.” (Pp. 1410-11.) Anyone who has ever clicked “I agree” without clicking through to the hyperlinked Terms and Conditions (i.e., everyone) should identify with her frustration at the bait-and-switch. A contract drafted and designed to be ignored ex ante; the consumer who ignored it blamed ex post.
Williams vs. Walker-Thomas is framed, in the case and in commentary, as a conflict between an egregiously exploitative commercial actor and an unusually vulnerable individual consumer. That framing is too simplistic even for the particular case, and is certainly too simplistic for the modern consumer-firm contracting dynamic. But knowing the Walker-Thomas business model, and having a sense of Williams’s experience of the transaction, it was perhaps more difficult to cling to the legal fiction of mutual assent, more urgent to acknowledge the reality of Williams’s plight. In Fleming’s telling, the reckoning with “the Ora Lee Williams situation” pushed lawmakers to confront the limits of the common law and look to other avenues of reform. (P. 1425.) In this moment of focus on the assent problem in consumer contracting, Fleming’s insistence on zooming out—over time and across institutions—suggests a crucial context for understanding the next stage of reforms.
Contract in the common law lacks a unifying theory. In this article, Robin Kar offers an intriguing descriptive and normative theory of “contract as empowerment” to explain and harmonize the relationships of core contract doctrines such as consideration, the expectancy damage default rule, and fairness rules such as unconscionability. The result is a highly coherent, aesthetically pleasing, and jurisprudentially compelling account of contract that sets the stage for what promises to be an important scholarly project.
Typically, I read articles propounding new general theories of contract with a jaundiced eye. Contract law has long resisted a true general theory because the body of what Kar refers to as “true contract”—e.g., excluding other theories of obligation such as promissory estoppel and restitution—suffers from a schizophrenia that extolls private autonomy on the one hand while demanding deference to communitarian interests on the other. Many scholars have attempted to justify the institution of contract law on the basis of economics, the morality of promising, reliance, fairness, autonomy, consent, and a host of other contenders for the Sauronian theory that rules all contract doctrines. But each attempt fails to establish a general theory that harmonizes contract because contract doctrines appear to serve so many different and incompatible goals. Thus, theories of contract that work well for some aspects of contract crash in heaping wrecks upon the shoals of others that serve countervailing goals.
Kar begins with the descriptive (and later normative) proposition that the common law of contract “should be set up to empower people to use promises as tools to induce others to action and thereby meet a broad range of human needs and interests.” From this point, contracts become legal obligations because the promisor uses the promise as a tool to induce the promisee to act in a manner sought by the promisor and to achieve the promisor’s ends. Where the promisor’s ability to induce the promisee to action depends upon the promisee having the legal ability to enforce that promise, the promisor must accede to the legitimacy of the promisee actually using that enforcement capability in the event of promisor breach. Thus, by providing parties with the capability to make promises that are legitimate, legally enforceable obligations, contract law generally empowers those parties to use promises to satisfy their personal needs and desires.
The harmonizing power of this basic theory is best illustrated by Kar’s examination of the default expectancy remedy. Here, Kar focuses upon the degree of control that expectancy damages provide to promisors in determining the amount of inducement they want to assert over the promisee. In contrast to Lon Fuller’s and William Perdue’s famous argument that expectancy damages are justified because they serve as a rough proxy for the actual costs incurred by non-breaching parties, empowerment theory justifies the expectancy damages default rule on the basis that such damages are measured against the legally enforceable promises that the parties used to induce each other into the contract. Rather than being a mere proxy for reliance damages, expectancy damages are normatively justified by the empowerment theory because they empower the parties to choose exactly the level of inducement to associate with their respective promises at the time of contracting.
Kar’s subsequent analyses of empowerment theory with respect to alternative expectancy damages jurisprudence, consideration, interpretation, and fairness doctrines all continue building a careful and thoughtful case that the theory harmonizes the disparate influences of private autonomy and communitarian interests (among others) that riddle common law contract doctrine. At each stage of the argument it becomes steadily more apparent that this is a compelling argument that may answer many of the difficult theoretical issues in contract. But it is Kar’s normative case for empowerment theory that makes me excited about future engagements with this project.
Kar’s empowerment theory is intriguing in that it justifies contract in contractualist, rather than consequentialist, morality. “Rather than asking which rules produce the best economic consequences without more, it asks whether certain rules, with certain expected consequences are ones that no one could reasonably reject in light of the available alternatives.” As Kar later notes, this moral justification of contract as empowerment necessarily acknowledges individuals’ economic motivations but also recognizes moral reasons for engaging in promise making. Individuals engaging in contract must, under this theory, treat each other as “moral equals” rather than mere instrumentalities toward achieving economic ends. The result is a satisfyingly humanized model of contract that partakes of economic thought but adds a moral axis upon which to assess contracting behavior.
I truly enjoyed this article. As Kar notes, the purpose of this article is to introduce the theory of contract as empowerment, and the article offers a few hints throughout regarding further investigations Kar plans in this area. I am eagerly looking forward to those later installments.
Omri Ben-Shahar and Lior Strahilevitz, Interpreting Contracts via Surveys and Experiments
, U. of Chi. Coase-Sandor Inst. for L. & Tech.
Research Paper No. 791 (2017), available at SSRN
Despite its practical importance, contract interpretation is the red-haired stepchild of the 1L classroom–the doctrine is infamously incoherent, rests on law/fact distinctions which even the Restatement elides, and testing meaning on a final exam can only succeed using artificially simple narratives. Many of us bring a rubber chicken to class at least once a semester because that fowl case is (at least) written-well and marches through alternative meanings, though the holding rests on a deus ex machina of burden shifting. It’s a stewing mess.
Chicago’s Omri Ben-Shahar and Lior Jacob Strahilevitz aim to free us of the burden of teaching both parole evidence and interpretation, and, along the way, reduce aggregate contract litigation costs and contract length, while improving readability and denying firms the ability to bully their opponents in court with expensive lawyers. If their forthcoming article, Interpreting Contracts via Survey and Experiments doesn’t achieve all its ends, it still is undeniably (in their words) a “major new move” in the field. It will generate discussion in class and in the law reviews, and it’s worth your time to read.
The pitch is titular. The authors assert that contract interpretation is inconsistent across jurisdictions, overly complex, and unpredictable. That’s so in part because courts aren’t themselves clear about what they ought to be doing (are they interpreting, gap-filling, gatekeeping, or creating), and in part because they haven’t followed the approach of judges facing the problem of confusion in the trademark context and embraced survey methods. Contract litigation is bespoke, while it ought to be standardized.
Their proposal would outsource the problem of meaning to survey respondents (matched to the kind of individuals who sign the sort of contract in question). Thus, general samples of Americans for consumer contracts, lawyer samples for standard merchant contracts, and perhaps diamond dealers for diamond contracts. (The more particular the field, the smaller the population to be tested, but always one that is larger than the particular signatories.) Those individuals would be asked (either in surveys or in experiments testing different terms) about their understanding of terms in dispute: the contract’s meaning would be, by and large, the majority’s. The paper admirably provides a proof of concept through five examples– two in the insurance context, two employment disputes, and one consumer contract – where a national sample they recruited provided evidence of meaning that contradicted learned jurists’.
The authors acknowledge leaving many methodological questions open – i.e., how much context to provide, how to determine the percentage of respondents necessary to prevail, how to handle expert battles, what to do about demographic differences. But the basic idea is simple to grasp: parties should prefer interpretation-via-survey to interpretation-via-Pacific-Gas. Thus, even if hide-bound courts were not to immediately adopt the survey proposal sua sponte, at the very least well-counseled parties should begin to contract into survey interpretation though clauses analogous to common and well-accepted merger and no oral modification terms.
The Article is rich, learned and thoughtful and the brief summary above does it insufficient justice. Like many significant pieces of scholarship, it provokes questions—both descriptive and theoretical.
The authors claim that interpretation is a serious problem for consumer contracts (and indeed, think their proposal fits best in such cases). But they might have spent more time providing evidence for the claim: aren’t most consumer contract cases really about formation and defenses to obligation, not meaning? To the extent that the ratio of consumer-contract interpretation cases to merchant-contract cases is low, perhaps more time ought to have been spent exploring the complexities of surveys of the latter sorts of deals.
Second, and again focusing on consumer contracts, does it really make sense to simply pull meaning from language that no one – neither the drafters nor the adherents – expected to be read? The authors are ready for the question:
The primary answer (albeit disappointingly simple) is: it’s the law! This criterion—how an ordinary recipient of a contractual message would understand it—is a touchstone of contract law, used to determine the meaning of advertisements, offers, and contractual terms.”
This is literally true as a statement of what students are supposed to say on the Bar Exam. But it’s not realistic. Most of you will agree that the search for objective meaning in interpretation is a legal fiction – and that, therefore, there is something potentially externally invalid and perverse about survey respondents (who are motivated to read and pay attention) determining the meaning of terms that ordinary consumers are motivated to ignore.
Stepping back from these concerns, the best part of this paper is the invitation it offers to think about why we have the doctrine we do – what values are advanced through individualized, rather than aggregate, interpretation? Are the benefits worth the costs? Is the answer the same for all sorts of contracts? If Ben-Shahar and Strahilevitz have correctly identified a potential efficiency, perhaps firms will take up their invitation and customize the interpretation regime. At that point, courts will have to choose whether to permit this form of tailoring, or (as is the case in many areas where parties try to assert control over litigation) to work around it.
Cite as: David Hoffman, “A Major New Move” in Contract Interpretation
(November 17, 2017) (reviewing Omri Ben-Shahar and Lior Strahilevitz, Interpreting Contracts via Surveys and Experiments
, U. of Chi. Coase-Sandor Inst. for L. & Tech.
Research Paper No. 791 (2017), available at SSRN), https://contracts.jotwell.com/a-major-new-move-in-contract-interpretation/
Amy J. Schmitz, Remedy Realities in Business-to-Consumer Contracting
, 58 Ariz. L. Rev.
213 (2016), available at SSRN
How should the law respond to the plight of consumers who have little viable recourse when a business breaches their contract? For an overview of this problem and a review of the potential strengths and weakness of online dispute resolution (ODR), there is no better article to read than Remedy Realities in Business-to-Consumer Contracting (Remedy Realities), Professor Amy Schmitz’s contribution to a symposium in honor of the late Professor Jean Braucher, herself a leading writer about and advocate of consumer protection in business to consumer contracts.
Professor Schmitz’s article first reviews the reasons consumers find themselves with limited recourse when disappointed with their business’s performance, including take-it-or-leave-it form contracts that disclaim warranties, limit remedies, and require often one-sided arbitration and a waiver of class actions. In addition, consumers “lack the time, knowledge, or patience” to pursue their claims and are beset with business strategies that deter remedy seeking. Although legal literature has well-documented these problems, Schmitz’s article sets forth a nice summary and adds important data, such as the waning of class arbitration in the years subsequent to the U.S. Supreme Court’s curious (in my view) decision in AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740 (2011), which reinforces arbitration and class waivers. Remedy Realities does much more than this, however. Inspired by Professor Braucher’s work on consumer protection, Schmitz evaluates in some detail how ODR may ameliorate the consumers’ plight.
Schmitz is not content with existing complaint portals in part she says because of their unreliability and lack of manageability (“it has become nearly impossible to navigate the largely unmonitored review and complaint websites”) and their lack of teeth in resolving disputes. She argues that ODR has more potential. As an example, she sets forth eBay’s dispute procedures, which allow a buyer to file an online complaint. If the seller does not respond satisfactorily, eBay can assign an ODR “neutral” to decide the dispute. Further, eBay can use PayPal to hold back funds and enforce the neutral’s determination. eBay’s resolution procedures, as well as other ODR entities, “use online processes to end disputes without need for the travel, stress, inconveniences, and other costs of traditional . . . resolution measures.” (Schmitz points out, however, that eBay’s user agreement also includes a binding arbitration clause if resolution fails.)
Although a proponent of ODR, Schmitz isolates some of the hurdles to success of the process. One important concern is potential consumer reluctance to participate in ODR in part because of privacy concerns. Further, she points out that ODR may be costly for businesses and therefore trigger price increases. The process might also diminish the business practice of allowing automatic returns. In addition, Schmitz notes and documents the problem of “differential access to the Internet” among consumers with complaints. Finally, and perhaps most important, taking a lesson from some arbitration procedures, she observes that ODR entities may be partial to the businesses that retain them.
Although Schmitz discusses possible solutions to these problems, the reader may come away with some doubt about the potential of ODR, at least as a complete solution to the problem of consumer rights. For example, Schmitz writes that the problem of privacy calls for designers of ODR systems to develop “robust means for protecting privacy and encrypting data.” The problem of business partiality, she explains, requires “collaboration with governmental regulators … to ensure system fairness,” including rules to review and accredit ODR programs. The reader may question whether Schmitz is asking a lot and is too optimistic about the potential of designers and government to achieve these goals. Perhaps ameliorating the problem, ODR entities and regulators can look to Europe where ODR is popular and successful and pattern their processes accordingly.
Additional possible solutions, perhaps working in tandem with ODR, come to mind. For example, the New York Times recently reported that the Consumer Financial Protection Bureau adopted a new (but controversial) rule that bars financial firms from prohibiting class actions. Also, I wonder if Schmitz is too pessimistic about the potential of complaint portals. In fact, she argues that businesses should favor ODR in part because ODR will “hinder consumers from spreading negative publicity on social media.” Another possibility is a more formal role for watchdog websites that can monitor business terms, collect additional information about business practices, and spread the word about worrisome terms and practices.
No subject today is probably more important than technology’s effect on legal and social issues. Scholars working in this area should read Remedy Realities. In a follow-up article that has just surfaced on SSRN, The New Handshake: Where We Are Now, Schmitz and her coauthor Colin Rule, pursue the effect of technology on consumer rights. They see problems: “The internet has… usher[ed] in a new age of consumer confusion and disempowerment.” In Remedy Realities, however, Schmitz sees a potential solution in ODR.
Obviously, I have only scratched the surface here in explaining the problems consumers face in pursuing their rights and in the potential of ODR. For an excellent discussion that helps move the ball forward, read Amy Schmitz’s article, Remedy Realities in Business-to-Consumer Contracting.
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.