Aditi Bagchi, Contract and the Problem of Fickle People
, 53 Wake Forest L. Rev
. ___ (forthcoming), available at SSRN
Whether by design or by accident (or both), the world rewards people who are stable—who have reliable desires, low discount rates, and long-term plans. Young children who pass the marshmallow test appear to do well on achievement tests ten years later. “Commitment” and “follow-through” are often prized cultural values, and focus and single-mindedness often correlate with success. We link consistency with rationality; economists often don’t even know what to do with people who don’t have consistent preferences.
As Aditi Bagchi suggests in Contract and the Problem of Fickle People, maybe the law inappropriately helps to enshrine this state of affairs. Even if stability contributes to productivity—we can’t build skyscrapers or microprocessors if we’re changing our minds all the time—perhaps arguments routinely made about the private law artificially and accidentally overvalue stubbornness, rigidity, and resistance to change.
As Professor Bagchi observes, different people might assign different meanings to the ability to change beliefs and moral commitments over time. “Some people pride themselves on being constant and only reluctantly let go of beliefs and values as they prove untenable. They call it personal stability,” she writes. “Others pride themselves on self-reinvention, shedding identities often. They call it personal growth.” Apart from concerns about how one person’s fickleness may harm others—which the law should clearly consider—Professor Bagchi asks whether it is appropriate for contract law to favor one approach to personal development over the other.
Her argument is mainly a challenge to theories of contract law that rest on the morality of promises alone—and particularly on a view of that morality that rests, in turn, on a traditional understanding of personal autonomy. “Our moral interest in changing our minds does not generate a right to harm others,” she argues, “but it does generate a reason not to have courts hold us to our commitments for our own sake.” Promises may promote a particular type of personal autonomy, grounded in a view of humans as stable creatures. Many people may value this conception of human morality. But Professor Bagchi’s point is that it’s not obviously desirable in all circumstances, and it’s not necessarily valued by everyone. After all, while we prize stability, we also value open-mindedness; we admire moral conviction, but we also seek to change and to grow. Holding us to a past promise just because we once made it does give a new sort of capability to stable people, but maybe it also discourages us from reevaluating our priorities; after all, on its face, a set of moral rules that prioritize our past priorities over our current ones seems, at the very least, a bit stagnant.
Of course, none of this means that promises generally shouldn’t be enforced. After all, while personal growth might encourage us to try to get out of a past commitment, so might cynical self-interest. Professor Bagchi’s point is just that while the morality of promises alone may justify the legal enforcement of promises in some cases, for some types of people, its justification is not necessarily as universal or persuasive as philosophers often take it to be. “It is surprising,” she observes, “that the philosophical literature on promise has rallied so completely around the value to one’s autonomy of being bound.”
So, instead of grounding contract law exclusively on a traditional conception of promissory morality, contract law should rest on other bases as well. As Professor Bagchi reminds us, contract law has no single justification—or as Mel Eisenberg once put it, “law generally, and contract law specifically, have too many rooms to unlock with one key.”
That is, modern contract law isn’t a simple implementation of analytical moral philosophy, much less particular views of human autonomy. Simple donative promises are, of course, not enforceable merely for the reason that a promise has been made. Many contract rules—principles of mitigation, Hadley v. Baxendale, and so on—end up splitting losses among the parties in various ways, rather than letting damages serve exclusively as a way to right the moral wrong of breach. Some legal rules exist just because they make the law more administrable. Professor Bagchi’s nice questioning of the broad application of a single type of philosophical argument is a reminder that contract law is not—and should not be—easily reduced to one clean, theoretical framework.
About fifteen years ago, Bruce Mann’s Republic of Debtors offered an intriguing narrative about the origins of American bankruptcy law. Among other claims, Mann suggested that debt became respectable when respectable people found themselves in debt. When debt moved in from the fringe, our legal treatment of debt softened.
Anne Fleming tells a related story in our treatment of debt, but her focus is on poor debtors in New York City. Although the small sum loans that she studies may be on the fringe of finance, her account makes clear that the debtors who have relied and continue to rely on fringe finance are many, and together constitute a large, struggling class of workers. They are not outliers to our economic model but an integral part of it. We rely on their low wage labor and their debt-fueled consumption. And we have not devised any alternative to debt, no large-scale method by which low-income people can survive adverse events—at least not one that imposes lighter costs than perpetual debt.
While early reformers and policymakers may have been as critical of debtors for irresponsible behavior as of their creditors, most of Fleming’s story, which starts almost a century after Mann’s, takes place in a time when debtor, creditor and regulator have all ceased to regard debt in the severe moralistic terms in which it was regarded at the dawn of the republic. Debtors seem to know that they are dealing with unscrupulous lenders and regard their debt as well as its evasion as unfortunate aspects of their economic position. Creditors are the bad guys, if there are any; lenders are not in a position to moralize about debt. Regulators too understand that the working class poor often have no choice but to take out loans in order to tide themselves over when there is an unexpected expense or an interruption in earnings. The system is designed that way, or at least, it has not been designed to avoid the phenomenon of small sum, high-interest loans.
The history of how cities, especially policy leaders like New York City, have dealt with the small-sum lending industry is an illuminating but frustrating lesson in how we can (try to) regulate contracts that are oppressive but unavoidable for a segment of the population without better options. It may be true of most contracts that a choice to optimize regulation of the transaction for the median consumer comes at the expense of those with minority preferences, or outlier circumstances. But small loans pose a still deeper challenge because most borrowers both need the loans and face serious risks from them. A regulation that operates to the benefit of a borrower at one time will operate against the interests of that same borrower at a different time. Target borrowers for these loans cannot borrow without risk, but they are ill-equipped to bear those risks.
Fleming conveys the difficulties in regulating these loans. She describes the industry’s tactics of creative regulatory evasion. For example, loans were sometimes structured as salary purchases rather than debt contracts; debtors granted power of attorney to creditors in order to move transactions out of New York state, and; creditors purported to charge fees rather than interest in order to avoid usury laws. Fleming also explores the dynamics of regulation in a federal system, with states at once learning from and impeding each other, and the federal government slowly and inconsistently intervening in the industry. Although most of the action is in the executive and legislative branches, because lenders avoided going to court to collect, there are a few court cases in which courts are surprisingly solicitous of regulation even in the Lochner era. They seem to understand very early the hard choices surrounding small loans. The early consensus that the industry must be regulated makes it one of the oldest “regulated industries.”
One of the most interesting and surprising aspects of Fleming’s narrative is the political economy of regulation. Employers like Erie Railroad Corporation and Gimbel Brothers played a critical role in the courts and behind the scenes in resisting attachments on their employees’ wages. Relatively reputable lenders sided with regulators and favored uniform laws across states in order to disadvantage more fringe lenders. Reform entities like the Russel Sage Foundation aligned with the industry in favor of a uniform small loan law. Reformers’ support for weak regulation made them suspect in the eyes of those, like Fiorello La Guardia, who continued to see the industry as wholly nefarious.
Fleming ably guides us through the vicissitudes of regulating the small loan industry. We do not emerge with any clear sense of a regulatory solution. Instead, we learn the limits of bettering a transaction by way of contractual limitations. Neither regulations tailored to the transaction-type nor judicial application of general contract principles are sufficient to make small loans savory. Some debt contracts cannot be made better without giving borrowers better options altogether.
Stephen C. Mouritsen, Contract Interpretation with Corpus Linguistics
(Nov. 4, 2017), available at SSRN
Interpretation of contractual text may be the most important task courts perform in contract disputes. It is also the least predictable. Courts fall back on archaic canons of interpretation and employ poorly defined and spongy concepts for eliciting the meaning of words. They sometimes use textual approaches, and other times admit extrinsic evidence to understand the context. As a result, contract interpretation is erratic, and the resolution of contract disputes becomes complex and costly.
Despite murmurs of judicial skepticism and mountains of academic criticism, the most commonly used criterion in contract interpretation is the “Plain Meaning Rule”—the idea that if the language is clear and unambiguous courts should not consider any extrinsic evidence. But how to tell if a word is susceptible to a single plain meaning? Is it enough to look at dictionaries or to invoke judicial imagination to determine the unambiguous plain meaning?
In my own work and teachings, I have been advocating for a shift towards a data-driven search for plain meaning. My recent article with Lior Strahilevitz proposed one such empirical interpretive method: using large surveys. Now, a major new contribution to this timely enterprise of data-driven interpretation is being proposed by Stephen Mouritsen. In an original and provocative article, Mouritsen introduces a method of interpretation based on empirical linguistics, and demonstrates—quite dramatically—the improvements it delivers relative to existing methods.
Consider the following example, taken from Mouritsen’s article. An insurance contract covers bodily injuries, but explicitly excludes injuries arising from participation in “any sports.” If the injury is a result of recreational snorkeling, does the exclusion apply? Is snorkeling a “sport”?
A federal court said no. The judge looked at Webster’s Dictionary and found that the definition of “sport” is “rule-based athletic competition.” Since snorkeling is not governed by any traditional set of rules and it is not competitive, the judge concluded that it is not a “sport” and thus injuries occurring from it are not excluded from coverage under the contract.
That analysis, Mourtisen shows, is deeply flawed. The same dictionaries used by the court to define “sport” as a rule-based competition also provide a second meaning for “sport”: a “physical activity that gives enjoyment or recreation.” Snorkeling is surely a physical recreation! It turns out that the court’s own methodology to prove a single plain meaning—consulting leading dictionaries—supports each of the two opposing interpretations advocated by the parties. And when a text is susceptible to two plausible interpretations, the plain meaning rule could no longer be invoked—and should not have been relied on—to resolve the dispute.
But the exciting contribution of this article is not in showing that a word is susceptible to more than one meaning—this is old news. The breakthrough is in applying an empirical method known as corpus linguistics to choose the more appropriate meaning among the two competing dictionary definitions. The method Mouritsen applies does not require the usual messy investigation into the contract’s surrounding context. It applies, instead, a quantitative and objective analysis to determine how the word is typically used in natural language.
The technical application of corpus linguistics to contract interpretation is quite simple, not much more exacting than learning how to use Westlaw. A digital search for the disputed word or phrase is made in a large corpus—a database of texts that represent the language used by the parties. An appropriate database for many contract disputes is the freely available Corpus of Contemporary American English (“COCA”). The search results can then be sorted according to the most common words that typically co-occur with the word in question. Each of these frequent accompanying words provide a qualitative sense of context. Since there are many such frequently co-occurring words, a simple quantitative test can then determine which meaning and context are more common.
What does the corpus linguistics method tell us about “sport”? Mouritsen searched COCA and found the common words that most co-occur with “sport”—words like professional, teams, fans, pro, Olympic. He looked at the 100 most common contexts in which the word “sport” co-occurs and found, strikingly, that in only one case its usage referred unambiguously to recreational activity (bungee jumping), whereas at least 50 contexts referred explicitly to “sport” as rule-based athletic competition, and many others strongly and unambiguously suggested the same. Apart from a small subset of contexts not related to either meaning, the result is an overwhelming quantitative prevalence of “sport” as rule-based competition, with only exceedingly infrequent use in the alternative meaning of physical recreation. “To the extent that our understanding of plain meaning has a frequency component,” Mouritsen sensibly points out, “we might conclude that the plain meaning of sport is rule-based competition.” A conclusion, he notes, that is not available through qualitative introspection.
Under the corpus linguistics method, snorkeling—which is not a rule-based competition—should not be interpreted as a “sport.” The court, in that case, got it right; but for the wrong reason. Had the court truly relied on dictionaries and then applied the “susceptible to more than one meaning” test for ambiguity, it would have concluded that “sport” is ambiguous and either demanded additional evidence or applied the contra-proferentem tie breaker. Instead, with corpus linguistics interpretation, the court would reach an unambiguous definitive interpretation.
Corpus linguistics, Mouritsen shows, can also help identify circumstances where a specialized or less common meaning is likely intended—again, without lengthy legal proceeding over the credibility of extrinsic evidence.
While corpus linguistics deploys rigorous tools and large databases to identify common meaning of language, it is of course not free from various subjective judgments. Which corpus to use? How to interpret the co-occurring words? But these determinations are done in an explicit and systematic manner, no longer fudged in the cognitive depths of judicial intuition. The time has come for courts to give data-driven interpretation methods their deserved attention.
Robin B. Kar & Margaret J. Radin, Pseudo-Contract & Shared Meaning Analysis
, 132 Harv. L. Rev.
(forthcoming 2019), available at SSRN
By now, it’s old news that contracts have undergone a transformation in the couple of decades and not for the better. Just thirty years ago, it was a relatively rare occasion when the average American entered into a contract. It may have been a lease or a home purchase, or maybe a car rental agreement. But to purchase a shirt at the mall did not require signing a contract unless it was to sign one’s name on a credit card slip. What a difference the Internet makes. Now, people routinely are deemed to have entered into “contracts.” In their article, Robin Bradley Kar and Margaret Jane Radin address this phenomenon, putting the term “agreement” and “contract” in scare quotes to underscore how these types of “contracts” have “fundamentally different meanings” from their traditional counterparts. (P. 5.)They come up with a more appropriate term for these types of unread, ubiquitous contracts – pseudocontracts – and note the importance of using a different term to describe a different concept because the “use of homonymous terms for concepts that have evolved to have different meanings can mislead one to think that there is no fundamental difference” between the traditional contracting scenario and the one that online consumers routinely encounter. They write that “one must consider how contemporary methods of communication have altered the way parties use language during contract formation.”
Kar and Radin article is both normative and descriptive in that it describes how contract law should address interpretation issues and explains what courts have been doing – at least when they do it correctly (i.e. before ProCD and its ilk mucked things up and made teaching 1L Contracts so much more difficult). Their article is lengthy and chock-filled with terms which neatly capture hard-to-explain concepts. For example, they describe the incremental changes that contract law has undergone to doctrinally accommodate digital contracts as a “paradigm slip” which has the overall result of fundamentally changing core doctrinal concepts such as assent. They explain that their approach – “shared meaning analysis” is not “an alien approach to contract interpretation” but is “consistent with long-standing approaches that are rooted in a nuanced and careful assessment of the shared meaning that private parties produce when they use language to form contracts.” (P. 8.) This is basically the same “contextual” approach adopted by the Restatement (Seconds) of Contracts and the Uniform Commercial Code, but which courts have applied in an uneven and erratic manner. Their approach does more than explain what courts have done (when they are applying interpretation rules correctly); it provides more transparency and “precision to traditional approaches by building on the well-known linguistic distinction…between what sentences mean (including any sentences delivered in boilerplate text) and what people mean when they use language to communicate with one another (including to form contracts.”) (P. 9.) Kar and Radin turn to the work of Paul Grice, a philosopher of language, who distinguished between the meaning of a sentence and what a speaker means when using that sentence within a particular context.
Kar and Radin hone in on what “context” means, explaining that sometimes speakers mean something different or additional to what is expressly said. An example they give is a lackluster recommendation which damns with faint praise, such as a “recommendation” for a Supreme Court clerkship which notes that the applicant engaged in a “great amount of independent legal research and writing” and “showed up for class on time on every single day.” Even though the letter does not expressly say anything negative about the student, the letter clearly implies that the student is unqualified for a Supreme Court clerkship.” The information is conveyed by “conversational implication” meaning that it was part of the professor’s meaning, but not the meaning of any sentence.
The authors then move to the cooperative norms that govern language to form contracts and explain how these norms explain doctrinal concepts, such as the implied duty of good faith which is part of the performance of every contract. The problem with boilerplate is that it is too long and violates various linguistic/conversational maxims (e.g. the Maxim of Quantity, the Maxim of Manner, etc). Because boilerplate is not actually created as a result of cooperative conversation during contract formation, they argue that much of it – though not all – “currently fails to produce any actual agreement with shared meaning during contract formation.” (P. 22.) Consequently, “(b)oilerplate text that is never cooperatively communicated cannot contribute anything to a ‘common meaning of the parties’ produced during contract formation.” (P. 22.)
Kar and Radin then dissect how shared speaker meaning is produced in classic offer-and-acceptance scenarios and contrast that with boilerplate text which may have both contractual and non-contractual purposes. They propose a three-stage (actually four) approach to help courts distinguish the actual agreement of the parties from non-contractual text. They suggest that courts “simply imagine that all of the written and digital text exchanged during contract formation is converted into oral form and contributes to a face-to-face conversation between the relevant parties.” Then courts should ask: “Could this boilerplate text have contributed to an oral conversation that adds terms to a contract while preserving the presupposition that both parties are observing the cooperative norms that govern language use to form contracts?” This “thought experiment” would help courts manage boilerplate text as follows. First, the boilerplate text that falls within this boundary is part of the parties’ actual agreement and is enforceable unless an applicable contract law defense applies. Second, court may better be able to assess “potential hidden conflicts” such as arbitration provisions, waivers and exculpatory clauses which might be inconsistent with the parties’ actual agreement. Third, courts can evaluate remaining boilerplate text which may be neither part of the actual agreement nor in conflict with it.
The shared meaning analysis provides an alternative to generalist or blanket assent approaches to boilerplate. By focusing on shared speaker meaning, Kar and Radin are essentially doubling down on the core of contract law being about the intent of the parties. Of course, the intent of the parties and their reasonable expectations are where contract law should have been all along and where it was before the onslaught of digital boilerplate. Kar and Radin’s article is thoughtful and thought-provoking and should be read by those who might otherwise be tempted to succumb to the paradigm slip which threatens to undermine contract law’s very essence.
Fundamental legal and policy debates usually revolve not only around the goals that the law should pursue, and the appropriate means to achieve them, but also around the underlying facts. Reality is complex, and people tend to look for evidence, to perceive it and interpret it in ways that confirm their prior attitudes. Rigorous empirical research is therefore critically important. In recent years, a growing number of legal scholars have conducted empirical legal studies, often in collaboration with researchers from other social-science disciplines. The thought-provoking article reviewed here—on discrimination against women sellers by bidders in eBay auctions—belongs to this emerging genre.
Market-based allocations of goods and entitlements are presumably not only more efficient than centralized allocations, but also freer and more egalitarian. In the market, buyers and sellers freely transact on an equal footing, as opposed to being rewarded on the basis of their class, race, or gender. Of course, these ideals do not always materialize: there are market failures; transactions do not always reflect the free will of the parties; and markets are sometimes discriminatory. With regard to inequality, some have argued that what appears to be prejudice-based discrimination is actually “rational”—because race and gender are proxies for contractual performance; because profit-maximizing firms cater to the preferences of their prejudiced customers; or because cooperation works best between employees of similar social background. In theory, irrational discrimination cannot survive in a competitive market, simply because it is a faulty profit-maximizing strategy. Arguably, therefore, the continued prevalence of market discrimination indicates either that it is rational, or that our expectations of market competition are exaggerated (or both). Of course, rationality and efficiency do not imply desirability or even permissibility, but most would agree that these are relevant issues when it comes to understanding market discrimination and considering what to do about it.
To shed light on this question, one would ideally look for an environment where it is impossible to come up with any “rational” explanation for market discrimination. In the context of gender discrimination, this would mean a setting where the same products are sold and bought by men and women; contracting processes are identical; no extended, close relationships are expected between the parties; there are no gender differences in terms of perceived reputation; and so forth. Ideally, one would look at a large number of transactions involving a wide range of products. Designing such an environment experimentally would be a daunting task, and finding it in the real world practically impossible—or so one might think before reading Tamar Kricheli-Katz and Tali Regev’s fascinating study.
Having secured the cooperation of the eBay research lab, Kricheli-Katz and Regev analyzed 1.1 million transactions made through eBay—an extremely popular platform worldwide for e-commerce between private individuals (and commercial entities). The data used involved the sales of the 420 most popular products from each of the main categories of the eBay catalogue, between 2009 and 2012. Of the four sale platforms available on eBay, the study focused specifically on sales through auctions—because once a seller lists an item there, the final price is not affected by the seller’s behavior, but only by the buyers’ bidding, so that possible gender differences in bargaining behavior are irrelevant.
For each transaction, the researchers had complete data about the sales object; its presentation by the seller; the auction’s starting price; the hidden reserve price (if set by the seller); the final price; the number of bids made; the seller’s feedback-based reputation; the seller’s eBay experience; the seller’s and buyer’s gender; and more. Apart from the sellers’ feedback-based reputation—which was higher for women sellers—men and women sellers were pretty similar in most respects (with such a huge sample, almost any difference is highly statistically significant, so it is more important to look at the magnitude of the difference than its statistical significance). More importantly, when comparing the number of bids and final prices paid to male sellers with those paid to women sellers, the researchers controlled for all other variables so as to isolate the effect of gender.
Along with various findings concerning certain gender differences in item descriptions, risk-aversion, and buyers’ willingness to pay, the key findings were that women sellers received fewer bids than men, and were paid about 80% of the price paid to men when selling an identical new product, and 97% when selling an identical used one (most private sellers sell used items). The price gap varied across types of items, but there was no easily discernible regularity in this respect.
To complement the main observational study, the authors conducted two experiments. The first established that people accurately identified sellers’ gender based on their eBay actual profiles in 56% of the cases (even though the seller’s gender is not stated), misidentified sellers’ gender in only 8.5% of the cases, and could not tell what the seller’s gender was in the remaining 35%. In the other experiment, participants were asked how much they would be willing to pay for an $100 Amazon gift card, when it was sold by either “Alison” or “Brad.” Similarly to the actual eBay results regarding the sale of gift cards, when the card was sold by “Brad,” the average sum was $87.42, and when sold by “Alison,” only $83.34.
In the absence of any sensible reason to pay more for products merely because they are sold by men rather than women, the price differences found in the study appear to be neither rational nor efficient (unless one tautologically defines efficiency as maximizing the satisfaction of revealed preferences). The findings do not tell us whether such gender-based, price discrimination is conscious or not, although my hunch is that it is at least partly unconscious.
While these troubling findings are clear, their normative and policy implications are not. Arguably, bidders in eBay auctions pay less for items sold by women because other buyers offer lower prices for them. Is there anything morally wrong with that? And even if paying more for items sold by men than by women violates the moral prohibition on harming women by discriminating against them, taking legal steps to prevent price discrimination by private buyers might violate the prohibition on limiting people’s freedom. Of course, we might wish to eliminate gender-based discrimination even if there is nothing immoral in the behavior of any individual buyer. To complicate matters still further, unlike some types of discrimination, the study shows that women sellers are discriminated against by women buyers as well as men. Finally, even if one were to conclude that the government, or other entities, or eBay itself, should take measures to curb this discrimination, it is not at all clear what could be done in this regard. While the authors do not answer these questions, we should thank them for compelling us to seriously consider them.
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/