Excuse 2.0 is worth a careful read. The article supports contract law’s current treatment of the impossibility, impracticability and frustration doctrines despite the authors’ conclusion that these excuse doctrines are “notoriously vague.” In fact, according to the authors, this is exactly what we want and should expect of law that excuses promisors from their contract obligations in the face of what the authors refer to as systematic risk. Although the authors concede that “[m]ost risks fall on a spectrum between purely idiosyncratic and purely systematic,” (P. 21) the latter risk, the authors explain, affects populations, such as pandemics and wars whereas idiosyncratic risk impacts only individuals, such as the risk of fire to a promisor’s premises. An important thesis of the article is that in systematic risk situations ambiguous excuse law promotes compromise and loss sharing that lessens economic havoc in the long-term, such as bankruptcies.
The authors reason that when promisors cannot perform “through no fault of their own,” (P. 28) in the face of uninsurable risks such as a pandemic, excuse doctrine reduces the costs of breakdown to both parties, neither of which can bear the risk on their own. If the law that determines obligations of the parties in such situations is ambiguous, the authors argue, renegotiation, not lawsuits, is the likely result. “In such a situation, the parties will probably settle, to avoid the uncertainty associated with trial, and the costly process of litigation…[T]he payment they will agree on in their settlement…will reflect the uncertainty of the legal outcome.” (P. 33.)
Another important takeaway from Excuse 2.0 is that lawyer-economists’ superior-risk-bearer analysis of excuse law does not comfortably apply to systematic risk because the superior risk bearer is indeterminate. For example, “[n]either party to a commercial real-estate contract…was better placed to prevent a pandemic-induced lockdown, nor would either party be better placed to prevent a pandemic or a war.” (P. 25.) Nor would a low-cost insurer be identifiable, especially because insurance will not be available in the face of a risk that would “sink” the insurer. (P. 25.) The authors also point out that in a systematic risk situation neither party is in a good position to determine the likelihood of the risk.
A third contribution of Excuse 2.0 involves the authors’ discussion of the contrast between governmental responses to systematic risk and private excuse law. They observe that the government’s stimulus measures, in response to the recent pandemic, suffer from the absence of tailored payments to those in need and result in high inflation. Tailoring requires particular information, leading the authors to conclude that the excuse doctrines “offer a superior risk spreading system.” (P. 24.) Further, “[t]he virtue of the uncertain excuse doctrine is that it facilitates private tailored risk sharing when systematic risks lead to the risk of widespread insolvencies.” (P. 31.)
As with other important articles that develop counter-intuitive theories (for example, ambiguity in the law of excuse is good), Excuse 2.0 includes some debatable assumptions. For example, as support for their thesis that ambiguous excuse doctrine stimulates renegotiation, not litigation, the authors cite as evidence what they call “the Great Contract Renegotiation” of 2020. They assert that resolution of disputes occurred “without much litigation or legislative contractual reformation,” (P. 3) and that the pandemic led to “an almost unprecedented wave of contractual renegotiation.” (P. 3.) Surely, there has been lots of renegotiation, but the reader may rightly fear that the authors’ rhetoric overdoes it and their footnote support for this dramatic conclusion is thin.1
In addition, the authors emphasize the indeterminacy of excuse doctrine so enthusiastically (e.g., “notoriously vague”) that the reader may get the feeling that the authors believe, in contrast, that other contract rules are relatively certain. But doctrine such as material breach, duress, undue influence, modification enforcement, parol evidence rule and interpretation, one can argue, are equally uncertain and are as difficult as excuse law. In short, a reader may wonder about the wisdom of singling out excuse law for an argument in favor of ambiguity and may ponder where lines should be drawn concerning the benefits of clarity or ambiguity in contract law in general.
Some readers also may find unpersuasive the authors’ explanation for why risk sharing by judicial decree is not a helpful solution to the challenges of excuse cases. The authors suggest that risk sharing would complicate the analysis of excuse cases—“‘splitting the baby’ conflicts with excuse and impossibility doctrine as currently understood” (P. 32) —which seems to contradict their preference for indeterminacy in such cases. In addition, the authors assert that loss sharing by judicial decree would diminish beneficial private risk sharing, but they limit this analysis to situations in which a hypothetical sharing rule is 50% of the loss for each party: “[A] 50%/50% sharing rule weakens the private tailoring of risk sharing that is such an attractive quality of the uncertain excuse doctrine.” (P. 32.)
Despite these concerns, Excuse 2.0’s many contributions make the article well worth reading. The article’s assertion that excuse law’s ambiguity contributed to beneficial private loss sharing during the recent pandemic is itself an argument worth pondering. Other reasons for renegotiation surely played a role, such as the cost of litigation, the norms of flexibility and compromise among many business exchange partners, and the desire for successful long-term business relationships. But if the authors’ assertion about the importance of legal ambiguity in systematic risk situations is correct, they offer a valuable message for law reform in this arena: “[A]ttempts to remove ambiguity from excuse doctrine may be misguided.” (P. 7.)
- The authors cite one source of data from twenty-four states for the proposition that state court litigation declined by about 39% in 2020. Not clear is whether the data is for all contract litigation or just litigation pertaining to the pandemic’s disruption of contract obligations. In addition, it is not surprising if, as a general matter, litigation fell off in 2020, during the height of the pandemic shutdown The authors also cite one survey of retailers “that indicated that almost 50% received rent abatements during the early pandemic.”
We thank Professor Hillman for his acute review of our article, Excuse 2.0, in Jotwell. Hillman captures the crux of our article, that “in systematic risk situations ambiguous excuse law promotes compromise and loss sharing that lessens economic havoc in the long-term, such as bankruptcies.” Ambiguous excuse law spreads risk by leaving parties unsure of their legal rights after a systematic risk event, such as Covid-19, has occurred. Since each party thinks that there is a real prospect of either winning or losing a contract claim in the wake of the systematic risk event, contract renegotiations taking place in the shadow of the ambiguous doctrine tend to significantly impair the potential rights of both parties. The parties thus share losses—exactly what society wants from a macroeconomic perspective in the wake of systematic risk. For more on the main argument, please see our article and Professor Hillman’s review.
We write to respond to two important concerns raised by the review. First, the review notes that “the authors emphasize the indeterminacy of excuse doctrine so enthusiastically (e.g., “notoriously vague”) that the reader may get the feeling that the authors believe, in contrast, that other contract rules are relatively certain.” We don’t mean to say that excuse doctrine is the only ambiguous area of contract law, or even that excuse is the most ambiguous doctrine in contracts. Indeed, in most states of the world, attempting to avoid contractual liability via an excuse claim is a losing argument. When systematic risk transpires, however, we think that the excuse introduces considerable ambiguity, a view held by Corbin, Williston, and Farnsworth, among others. We also don’t think that legal ambiguity is generally good because ambiguity raises costs and risks for contracting parties. With respect to the excuse and impossibility doctrine in the face of systematic risk, however, we think that ambiguity has efficient properties in inducing risk sharing settlements that do not apply to these other areas of ambiguous doctrine. Although ambiguous doctrine may contribute to more equal settlements in other contract law domains, these risk sharing benefits are small in the ordinary course, where the least cost risk bearer analysis applies. Risk sharing, however, assumes greater importance for thinking about contract law when other sources of managing risk, such as insurance, are unavailable, as they are in the face of systematic risk. It is this characteristic, and not a unique amount of ambiguity, that differentiates ambiguous excuse doctrine from other ambiguous contract law doctrines.
Second, the review asks “why risk sharing by judicial decree is not a helpful solution to the challenges of excuse cases?” In other words, why can’t the judge just name a loss sharing ratio (e.g. 50%/50%) to promote risk sharing in the face of systematic risk? The judge could indeed impose risk sharing, but such risk sharing would not leverage private information to tailor the settlement to the needs of each party. If there is a fixed sharing rule in the face of systematic risk, then both parties benefit (or suffer) equally from the doctrine. There is no tailoring. Ambiguous excuse law, by contrast, spreads risk by settlement and not decree. If a party to a contract is near bankruptcy already, then the party has little to lose from “rolling the dice” with ambiguous excuse doctrine. A win is complete, while a loss harms that party’s creditors in bankruptcy more than the party’s own bottom line. As a result, the more financially precarious party will demand a more favorable settlement from the less precarious party. This means that loss sharing is “tailored” with ambiguous contract law. The more precarious party bears less of the losses from the occurrence of a negative event than the financially stronger party—a better distribution of risk than any fixed judicial sharing rule.
As we said at the outset, we thank Professor Hillman for his careful synthesis and invaluable insights regarding our article and look forward to further illuminating discussion with our readers.