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,L. L. Fuller & William R. Perdue, Jr., The Reliance Interest in Contract Damages (Part I), 46 Yale L.J. 52, 60 (1936). 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? See Hampton v. Federal Express Corp., 917 F. 2d 1119 (8th Cir. 1990). Even this relatively straightforward example shows the potential complexity of the problems in this area.
The article is long and intricate, and for that reason it may not have ended up on everyone’s reading list in this age of Twitter and attention-grabbing headlines. But unlike a lot of modern legal scholarship, it helps solve an important problem that courts face, and it does so without gimmickry, stodgy conceptualism, or overly grand and impossibly simple theories.
Professor Gergen aims first to draw attention to the factors that matter in deciding these cases: the reasons for imposing tort liability (on one hand) and what he calls the “quality” of the assent to the exculpatory term (on the other). He analyzes these reasons contextually, in place of courts’ traditional formalistic rules in this area. Courts long have addressed the effects of exculpatory clauses on third parties with conceptualistic principles like “a third-party beneficiary can’t have greater rights than a contract creates” or “a contract cannot eliminate the rights of someone who isn’t a party to the contract”; as Gergen points out, these rules may seem self-evident in some situations, but they make too much turn on often arbitrary determinations, like whether a claim sounds in contract or in tort.
Instead of accepting uncritically that a contract is ”either conclusive or irrelevant to the issue of the availability of a tort claim,” Professor Gergen offers a nuanced, context-specific analysis. Among other things, he shows the potential relevance of contract-law terms to a duty analysis in tort law, several possible roles that informational costs might play in analyzing the effects of third parties on the contracting process, and the (tentative) relevance of property law and the doctrine of equitable notice.
The interstices I mentioned are a ripe area for analysts of the common law, and Professor Gergen’s upcoming work in this area is sure to be equally—or even more—important. For example, at a few recent conferences, Professor Gergen has presented a novel transactional technique by which companies like Google and Facebook might be able to protect the privacy of customer information that falls into the hands of third parties. Analyses of privity, in this light, may cast an even more significant shadow.
In this insightful and well-researched article, Consumer Protection in the Age of Big Data, Professor Max Helveston arguably has opened stage two of a movement in contracts scholarship assessing the dangers and opportunities presented by large scale data aggregation for contract law and practice. Specifically, recent decades of contract scholarship have explored generalized issues surrounding information era contracting practices by producers with access to extraordinary amounts of data regarding their consumers. We could (but probably shouldn’t) refer this early stage as the “Oh crap! What does it all mean?” inquiry; it is probably better to stick with “Big Data & Contract 1.0.” That early stage examined the rapidly changing landscape of consumer-producer interactions in the early Internet and information-era context. The gist of Big Data & Contract 1.0 generally boils down to the proposition that consumers are largely screwed by the ability of producers to use data aggregation and analysis to bore down into consumers’ lives and preferences in a way never before possible in pre-information era contracting.
Despite the broad scope of the title, Consumer Protection in the Age of Big Data moves the discussion to “Big Data & Contract 2.0” by unpacking data analytics and aggregation in a specific contractual context: insurance. Insurance has always been problematic for contract law. The relationship between insurer and insured is traditionally perceived as a paradigm case involving gross inequality of bargaining power. The contracts involved are highly adhesive, consumers generally must depend upon insurance agents to select appropriate coverage and terms, and the resulting terms—which consumers often receive only weeks after they have purchased the insurance and will likely read only when a [hopefully] covered loss occurs—are highly technical and opaque to the typical consumer. This ground is well-traveled, and Helveston addresses the problem from a new angle.
Specifically, after surveying the broader scholarship on information era data aggregation and analysis as well as the privacy and data security concerns these practices raise, Consumer Protection in the Age of Big Data approaches the problem of insurance contracting by identifying the societal interests and norms surrounding insurance contracting. For Helveston, insurance contracts applying advanced data aggregation and analytics promise strong potential benefits. These benefits include increasing actuarial fairness by using Big Data to make more accurate assessments of each customer’s actual risk profile, creating incentives for consumers to reduce their risk profiles, and minimizing moral hazard problems.
But these practices also raise substantial concerns that insurers may use their market power and fine-grained insights into individual customers’ behavior to impair personal autonomy by requiring changes to behavior that reduce insurers’ exposure. Given the inelastic and non-substitutable nature of demand for consumer insurance products, insurers likely already have the ability to begin requiring insureds to agree to coercive lifestyle controls. As Helveston observes, “[i]f the datafication of the world becomes as extensive as some have projected, then a sword of Damocles might loom over many of individuals’ personal decisions.” (P. 33.)
Similarly, Big Data in the insurance industry creates substantial challenges for anti-discrimination norms. While states prohibit insurers from discriminating on the basis of race, religion, national origin, and other protected categories, aggregated data may provide numerous proxies that impose discriminatorily disparate impacts on consumers. As Helveston notes, wrongful discrimination may occur simply on the basis of machine learning algorithms that adjust premiums on the basis of factors correlated with protected classifications that nonetheless do not directly rely upon the insured’s membership in a protected class at all. Humans don’t need to discriminate; the algorithms may do it for us and without our knowledge or intent.
Helveston also notes that the ability of Big Data practices to provide potentially near perfect actuarial fairness in insurance contracts may ironically violate equality norms. As insurers develop more finely nuanced data regarding consumer risks, it becomes more likely that they will discover and price activities that correlate with risk. In this regard, Helveston observes, “[t]his is particularly disconcerting because many of the qualities that would lead insurers to confer beneficial treatment to an individual are not merely qualities that indicate that she possesses a low-risk profile, but are also qualities that cause one to receive more favorable treatment across social institutions.” (P. 33, n. 163.) Big Data practices thus threaten to exacerbate existing social and economic inequalities by pricing already disadvantages high-risk individuals out of the insurance market. In a related observation, insurers may similarly use such data practices to identify individuals least likely to contest a denial of coverage as well as to closely estimate the amount individuals would accept in settlement of their claims.
Helveston concludes by recommending federal regulation of consumer insurance contracts. In particular, Helveston proposes three key components for reform—community rating, policy content review, and prohibitions on consumer profiling. While I disagree substantively with the case for a single regulatory response to consumer protection in this area—the regulatory and government-induced market failures in the Obamacare/Affordable Care Act context suggest that the federal government has little expertise or competence in this area—Helveston makes a compelling case for reform.
This article is particularly important for the next stage of scholarship regarding data aggregation and analysis and its impact on contract law and practice. Helveston’s research is careful and his insights are challenging. More importantly, this article brings the Big Data & Contract 1.0 general field down to brass tacks by addressing a specific industry and the contracting practices that are impacted by Big Data practices. Information-era contract practice has matured, and this article calls us to examine the particularized implications of that field.
Cass Sunstein’s thoughts about the ethics of regulation are of more than theoretical interest. He served as Administrator of the White House Office of Information and Regulatory Affairs and has successfully championed the use of behavioral sciences in policy design. “Nudge,” which he coauthored with Richard Thaler, describes the use of choice architecture, or the background conditions for people’s choices, to improve outcomes. Sometimes outcomes are improved from the standpoint of others, as in environmentally-friendly defaults. Sometimes nudges are intended to improve outcomes for the very people (apparently) making the choices.
The Ethics of Influence takes on the objections raised against nudging. Nudging requires that someone decide the direction in which people should be nudged. Nudging can be opaque or even manipulative. Nudging can be a really creepy way for elites within the state to control private individuals, under the radar. The book takes on these potential problems directly and systematically. In part, it parses out benign from insidious nudging. Sunstein simply rejects most of the worst examples and allows that there are domains of private decision-making where nudging is simply inappropriate altogether. He distinguishes nudges that exploit cognitive defects in order to direct people toward behaviors that they would reject from nudges that prompt deliberation and choice.
His distinctions are useful. But as defenses they are not always reassuring, since one wonders who will draw lines in practice (it cannot always be Professor Sunstein himself) and one worries that the enormous and obscure power of nudging might lend itself to expansive application. In fact, it might be useful to redirect some of the scholarly attention presently focused on the minds of the nudged to that of the psychology of nudgers and other regulators.
Many critiques of nudging are not limited to what Sunstein would regard as its abuses. General critiques question the picture of human agency at the center of choice architecture. There is unease with the ability of regulators to engineer behavioral outcomes without ever owning up to a clear mandate.
One of the important strengths of the book is that Sunstein takes these lines of critique seriously and presents them generously. He rejects a concept of manipulation that would attach to most of the regulatory measures that he would endorse but he adopts in its place a credible conception of manipulation as an effort to influence people’s choices without sufficiently engaging or appealing to their capacity for reflection and deliberation. He doubts most nudging can be characterized as manipulative on these terms.
I have not offered many examples of the kinds of nudging he has in mind; the ones of particular interest here concern the background rules for contracts, especially contracts in the employment and consumer contexts. Although the book is obviously not interested exclusively or even primarily in contract law, Sunstein observes early on that “the common law of contract . . . is a regulatory system, and it will nudge, even if it allows people to have a great deal of flexibility.” (P. 35.) Contract law is not a spontaneous system of private ordering. Contracts are incomplete and courts rely on default rules. Default rules are nudges.
Perhaps the most powerful point Sunstein makes in favor of nudging is the idea that in many cases, there is no alternative to nudging. The question is rather whether people should be nudged deliberately and cautiously, with system-awareness about the effects of a regulatory rule. One can try to argue in favor of less calculating nudges—eg majoritarian defaults that are intended to reconstruct parties’ preferences—but Sunstein is persuasive that such inadvertent pushes are likely to be plagued with many of the same problems associated with regulatory nudging, and we have no reason to assume that spontaneous orders will be benign. People always make choices under background conditions that compromise our picture of what free choice entails.
It might be that it what is most disturbing about nudging as a regulatory tool is the human predicament on which it depends, and not the nudging itself. We cannot blame Sunstein for that. And if the most unsettling aspect of nudging is the lack of self-awareness that this regulatory tool projects onto (or merely observes of) private individuals, its greatest appeal may be the great self-awareness it demands of regulators. I am less optimistic than Sunstein that regulators can achieve clarity of purpose and successfully walk the line between legitimate and manipulative choice architecture. But readers are likely to be persuaded that this architecture should be deliberate and subject to scrutiny. As individuals, we might not be able to make our contracting choices with full awareness of how those choices are framed, or we might not wish to exhaust ourselves by internalizing that perspective. We might have a better shot at regulating the regulators, or collectively setting the terms by which our individual choices are framed. Politically accountable nudging might be another opportunity to exercise agency collectively in the face of unavoidable limits to individual agency.
Matthew Jennejohn, The Private Order of Innovation Networks
, 68 Stan. L. Rev.
281 (2016), available at SSRN
Relational contract scholarship is at a pivot point. On the one hand, the relationalist revival that has dominated contracts scholarship for almost half a century may be on the wane. Relational contract scholarship has evolved during this period into separate, and often dueling, intellectual traditions. One camp consists of scholars who are typically associated with the “law and economics” movement; in the other camp are scholars who more readily identify with the “law and society” tradition. While relationalists have been quarreling with each other, a younger cohort of law and economics scholars, armed with impressive technical skills, have abandoned relational questions in favor of projects that are capable of being analyzed through formal models or sophisticated empirical techniques. In turn, many other of the brightest stars in contract are formally trained in analytic philosophy and focus their energies on classical contract doctrine and the extent to which it adheres to deontological principles grounded in Kantian notions of autonomy. At its best, this new contracts scholarship is analytically elegant and generates counter-intuitive insights. But its analytical rigor requires strong simplifying assumptions. As a consequence, the bulk of this work is a far remove from the complex environment of relational contracting.
This pessimistic view of the legacy of relational scholarship is tempered, however, by the rise of a new institutionalist school of contract scholarship that offers the promise of an accommodation between the dueling branches of relational theory and a counterweight to the elegant but abstract analysis of the philosophers and economists. The new institutionalists reflect the older relationalists in their commitment to the belief that the institution of contract can only be understood by observing the law “in action,” but they go beyond relational theory to explore both the potential and the limitations of contract design in a world of uncertainty: how can we understand the circumstances in which different contractual patterns are used to organize different kinds and speeds of innovative activity? A particularly noteworthy example of this new institutionalist school is a recent article by Matthew Jennejohn, The Private Order of Innovation Networks, published recently in the Stanford Law Review.
Jennehohn’s project is to deepen our understanding of the “collaborative methods of innovation that have become a centerpiece of modern economic organization.” (P. 281.) In a number of industries characterized by rapid technological development, conditions of high uncertainty have led to collaborations where both parties’ skills and commitment to cooperate are necessary to achieve success. In settings as diverse as the pharmaceutical industry and manufacturing supply chains, parties have come to realize that the feasibility of many projects can only be determined by joint investment in the production of information to evaluate whether a project is profitable to pursue. A particularly salient example is the research collaboration between a large pharmaceutical company with expertise in bringing new drugs to market and a smaller biotech firm with innovative technology. The collaborative agreement seeks to discover, design and develop a novel pharmaceutical product, and then take that product through the FDA approval process and through commercialization. The common feature of all these regimes is a commitment to joint exploration without imposing legal consequences on the outcome of the parties’ collaborative activity other than in conditions of “bare-faced cheating.” Thus, neither party has a right to demand the performance that the parties imagine may result from a successful collaboration. If the parties cannot ultimately agree on a final objective, they may abandon the collaboration.
Jennejohn’s starting point is a critique of the “braiding theory” developed by me and my co-authors, Ron Gilson and Chuck Sabel, that offers an explanation for the peculiar features of these collaborations. Braiding theory argues that the collaboration rests on a governance structure that, over time, creates confidence in the capabilities and trust in the character of the counterparty. Viewed through this lens the governance of these commercial collaborations shares several common elements. The first is a commitment to an ongoing mutual exchange of private information designed to determine if a project is feasible, and if so, how best to implement the parties’ joint objectives. The second is a procedure for resolving disputes. Its key feature is a requirement that the collaborators reach unanimous agreement on crucial decisions, with persistent disagreement resolved by unanimous agreement at higher levels of management from each firm. Together, my co-authors and I argue, these two mechanisms make each party’s character traits and substantive capabilities observable and forestall misunderstandings. Working under conditions of uncertainty, the parties can expect to encounter unanticipated problems that can only be solved jointly and that may generate occasions of disagreement. Their increasing knowledge of each other’s capacities and willingness to share private information in service of their collective goals facilitates the resolution of problems and constrains opportunistic behavior.
Jennejohn’s principal critique is that braiding theory’s exclusive focus on opportunism is too narrow. Rather, he argues, these collaborations must also respond to two other problems that can cause these alliances to fail. The first is the risk of “spillovers”: the costs that arise when property rights in these innovative activities are not sufficiently defined and thus can bleed out of the effective control of the relevant commercial actors. The second problem is “entropy”: the need to coordinate the routines that translate inputs into the successful team production of outputs. Collaborators under this framework must trade off the governance mechanisms that constrain opportunism with mechanisms that limit spillovers and reduce entropy. His analysis of prototypical collaborations together with the preliminary results of an ongoing empirical project suggests that this multivalent approach better explains observed variations in design strategies in many alliance agreements. The result is a richer but more complex (and thus less clean) conception of the factors that undergird the design of collaborative contracts.
Jennejohn’s substantive critiques and his careful consideration of spillovers and entropy add importantly to our understanding of how collaborative alliances function. But more significant is the way his work melds the formerly disparate strains of relational scholarship. While his analytical techniques are clearly in the law and economics tradition, his methodology borrows importantly from the work of Ian Macneil. Like Macneil, Jennejohn offers a rich and complex story of contracting practices that is not amenable (at least not yet) to an elegant theory. Like Macneil (and others working in the law and society tradition) his methodology is “bottom up” empiricism, using both qualitative and quantitative techniques to build understanding over time. This stands in opposition to the economic relationalist approach of “top down” theorizing—using a widely accepted theory to isolate the salient elements that influence commercial parties’ behavior. Thus, like others working in this new institutionalist tradition, Jennejohn uses the analytic tools of law and economics to offer a rich descriptive account in the spirit of the law and society approach in order to describe how collaborative contractual arrangements function in a complex economic environment.
The accommodation between the law and economics and law and society methodologies reflected in Jennejohn’s work offers hope that we might free the relational enterprise from its current peril: those who believe that contract law scholarship requires attention to the ‘law in action’ need to concentrate their energies on developing unifying themes that will permit the relational project to be as vibrant and influential in this new century as it has been in the last one. Jennejohn’s work looks to just such a unification. What we need now are the voices of other “institutionalists” who will continue to examine the complex environment of contracting and propose principles that best explain how real world institutions maintain and support the ideal of human engagement through cooperative endeavor.