posted by Dave Hoffman
Bob’s opening post about the ALI Principles of Software Contracts project alludes to commentators who criticized Section 3.05(b)’s purported immutability. As a commentator to Bob’s post noted, a joint letter between rivals Linux and Microsoft is the most prominent example of this critique. According to lawyers representing the software concerns, a “far better way” of addressing the implied warranty of no material hidden defects would be to make it disclaimable, since implied warranties are ordinarily disclaimable under the UCC.
As Bob’s post points out, 3.05 isn’t strictly speaking immutable at all: the vendor can “contract out” by simply disclosing the defect! And even were that not true, contracts transferring goods with defects that are (i) material; (ii) known to the seller at the time of sale; and (iii) hidden would create a serious problem of good faith, which is not generally disclaimable under the common law or under the UCC. Providing a good that the seller knows is materially defective — when the buyer can not learn that fact before the purchase is completed – would very likely be bad faith. But why not permit such bad faith conduct to be disclaimed? Can’t Microsoft simply come out and say
“There is an implied warrant out there that promises you that the copy of Windows you are about to buy isn’t materially defective. Without admitting, or denying, that this particular copy of windows contains a material, hidden, defect, we hereby disclaim that warranty. Go pound sand.”
On a particular variant of economic theory, permitting sellers to disclaim the warrant of no material hidden defects would provide useful information to buyers about goods, enabling a market about such warranties to develop. If buyers wanted to buy software without material hidden defects, they would demand such terms from sellers, paying a premium over buyers who are content to live with the possibility of the software crashing their computer through a defect known to sellers. On the other side of the sale, sellers might seek to develop & sell reputations as companies that don’t wish to behave in bad faith toward purchasers. By standing by implied warranties, such companies would be able to differentiate themselves from others. Thus, Microsoft might continue to deploy buggy software at a cheap price, while Apple would burnish its status as a luxury seller.
A serious problem with this story is that groups of consumers don’t react to warranty terms for software in a way that creates the possibility of a virtuous cycle. (Bob’s the expert on that topic, and I hope he’ll engage with it in a later post.) But another problem is definitional. We don’t permit contracting entities to contract out of good faith because good faith is a necessary condition for contractual enforcement. It’s part of what makes a contract worth enforcing. Thus, both willful breach (the topic of some great recent work) and willful bad faith both take promissors and promisees outside of the ordinary contractual framework, where everything is subject to private agreement, and encourage judges to instead impose public, redistributive, values.
But why would that be? My pet theory turns on the extraordinary remedy for breach of contract: expectation damages available even for wholly executory agreements. Expectation protects a very odd social interest – reliance on another’s promise – by dispensing with its proof. Think about it. You can recover your expected profit for a breach of a contract that you’ve just agreed to, though you haven’t invested one cent in reliance on the bargain. The expectation interest thus gives parties entering contracts with a tremendous subsidy. But like most government subsidies, there is a string attached. Here, the price of expectation is a moderate degree of unselfishness, and thus an immutable good faith doctrine.