Category: Contract Law & Beyond

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Dichotomies in Contract Theory and Doctrine

In this blog post, I would like to examine some of the dichotomies in contract theory and doctrine that are noted in Professor Cunningham’s Contracts in the Real World.  Some would claim that contract law is revolutionary; others would argue that it is reactionary.  Compared to the status relationships of the Middle Ages, in which economic power was primarily determined through feudal or family relationships, contract and market relations promised a more egalitarian alternative.

In the classic text Ancient Law, Sir Henry Maine described the radical transformation from a feudal society governed by custom and hierarchy to one transformed by the industrial revolution, in which socio-economic mobility was not only possible, but which was expected.  On the other hand, many today would argue that contract acts as a reactionary force, for enforcing bargains strictly as written could result in reinforcing the power imbalances that already exist in society.

Contracts in the Real World notes these dichotomies and strikes a middle ground between them.  Prof. Cunningham characterizes the schism in contract law as a dispute between formalists and realists.  This schism, he posits, applies even to foundational matters, such as the question of whether a contract has been formed.  Prof. Cunningham notes that extreme formalists would champion a return to the days of the seal and enforce only those deals that meet the strict definitions of offer, acceptance, and consideration.

Realists, on the other hand, favor scrutinizing the context of every bargain, accepting the most informal of deals and even enforcing promises to make gifts as contracts.  Thus the dichotomy between formalists and realists turns into a debate over the extent of government or court involvement in private ordering.

Throughout the book, Prof. Cunningham walks a tightrope between these positions, often making reference to contract law’s “sensible center,” and noting that with many common problems, the rules that have evolved over the years make a good deal of sense.  In essence, he makes a case for the status quo, eschewing reform in either the direction of more government interference in contract, or government withdrawal from contract.

Prof. Cunningham suggests that current law strikes the proper balance between two rather extreme positions.  The book extols the earthy pragmatism of old precedents and wise judges, and suggests that these doctrines will ultimately win out and reach a balance.  In my next blog post, I will question whether this assertion holds true in the context of technological change.

Miriam Cherry is Professor of Law at Saint Louis University School of Law.  Some of her scholarship can be found at this link on SSRN.

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Contracts in the Real World and Contracts in Law School

Thank you to our hosts at Concurring Opinions for inviting me to participate in this online book symposium.   It is a pleasure for me to discuss Larry Cunningham’s engaging new book on contracts.

The title of Larry’s new book is Contracts in the Real World.   Intentionally or not, the title suggests that there may exist another realm for contracts other than the real world, a realm that is perhaps more theoretical and not completely real.   The alternate universe that most readily comes to mind is law school.  Contracts in the real world exist in partial contrast to contracts in law school.

Contracts in the real world bind parties and counterparties to one another.  Contracts in law school bind students to casebooks and laptops.  Contracts in the real world frequently revolve around compensation, obligations, and duties.  Contracts in law school frequently revolve around precedents, arguments, and defenses.  Contracts in the real world are about contracts.  Contracts in law school are about cases about contracts.  Needless to say more, there exists a meaningful and significant gulf between contracts in the real world and contracts in law school.

Larry’s book serves a bridge across this gulf.  Through wide-ranging popular stories about the prominent and the pedestrian crafted in accessible language yet not devoid of legal doctrine, the book connects contracts in law school with contracts in the real world.  Law school concepts like offer, acceptance, mitigation, and assignment are illuminated by real world stories of popular contracts involving Pepsi ads, Dateline NBC, Redskins tickets, and Haagen-Dazs ice cream.

The conceptual meditations of contract scholars like Cardozo, Corbin, and Williston are expressed and explained in contract controversies involving well-known figures such as Michael Jordan, Maya Angelou, and Lady Gaga, and through common experiences like purchasing lottery tickets, signing mobile phone agreements, and buying football tickets online.  Given the accessible language and popular stories, it is easy for the reader to be lulled into forgetting that they are reading and learning about the law, much in the same way that Tom Sawyer lulled his friends into whitewashing a fence by making it seem more like a treat than a chore.

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Prosecutors, Gambling and Dead Horses

Should federal prosecutors who settled a tax fraud case with the New York Racing Association back in 2003 (amended in 2005) be kicking themselves? Besides commitments typical of criminal settlement agreements (called deferred prosecution agreements), to improve internal control and governance, this one required the NYRA to continue its best efforts to install gambling machines at the track. It finally did so last year and the results have included the deaths of 21 horses during the winter meet.

Gambling is a controversial topic and New York State politicians had in 2003 just begun a push to expand the kinds of gambling that are legal in the state, starting with video gaming machines at horse racetracks. Why federal prosecutors settling a criminal tax suit should have anything to say about the NYRA’s role in advancing this agenda is not clear. Prosecutors did not explain their reasoning when signing the DPA.

In any event, the NYRA worked earnestly to move its gambling program along amid growing political and legal controversy in the state over gambling. It finally prevailed, opening a gambling emporium at the Aqueduct track in Queens in October 2011. In the ensuing season, an astonishingly high number of horses — 21 — died while racing.

In March, Governor Andrew Cuomo formed a task force to investigate and in May took state control over the track from the NYRA. The task force released its report last week identifying numerous causes for the deaths and prescribing extensive reforms of the NYRA and Aqueduct operations. Among the culprits: casino funding was allocated to massively increase awards to owners of winning horses in lower-level claiming races. Read More

Lochner Boo Boo: Free Self-Exploitation?

American legal history has featured many battles over “freedom of contract,” often interpreted as the “right” of workers to sell their labor at any price, under any terms. Given the recent resurgence of extreme freedom of contract views, I thought this reflection on the reality TV show “Here Comes Honey Boo Boo” might interest readers:

Americans, it turns out, can’t get enough of Honey Boo Boo, mom June, and the rest of the clan . . . some of whom come with nicknames that seem straight out of a quaint novel about those colorful southerners, like Sugar Bear. That Here Comes Honey Boo Boo trafficked in and showcased the grossest of gross stereotypes about lower middle class southern white folk was deemed inconsequential. The family, led by matriarch June, was in on the joke. How could the family be exploited if they actively wanted to be exploited?

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The Unenforceability of Contracts to Abort

TMZ has a scoop.  (Yes, I read TMZ.  Every day.)  Tagg Romney (son of Mitt) and his wife Jen entered into a surrogacy contract which contained a clause purporting to require the surrogate to abort on demand given a particular set of contingencies:

We’ve learned Tagg and his wife Jen, along with the surrogate and her husband, signed a Gestational Carrier Agreement dated July 28, 2011.  Paragraph 13 of the agreement reads as follows:

“If in the opinion of the treating physician or her independent obstetrician there is potential physical harm to the surrogate, the decision to abort or not abort is to be made by the surrogate . . . In the event the child is determined to be physiologically, genetically or chromosomally abnormal, the decision to abort or not to abort is to be made by the intended parents.  In such a case the surrogate agrees to abort, or not to abort, in accordance with the intended parents’ decision . . . Any decision to abort because of potential harm to the child, or to reduce the number of fetuses, is to be made by the intended parents.”

It is a common error to think that contract terms are specifically enforceable as written.  I believe that there is literally not one judge in the country who would require a surrogate to abort on demand against her wishes notwithstanding this clause.  In part, this results from the law’s traditional reluctance to enforce specific performance of personal services contracts.  Here, that’s coupled with the constitutional interests in bodily integrity that the Baby M court discussed.  Thus, while TMZ translates the agreement as “Tagg and his wife, Jen, had the right to abort the fetuses if they felt they would not be healthy,” the better line would be “Tagg and his wife, Jen, have an exit right which they can exercise if the surrogate fails to abort.”

That is, failure to abort on demand would be a material breach by the surrogate, relieving the Romneys from their duty to pay.  Whether it would additionally then lead the Romneys to be able to sue – for costs incurred, probably – is unclear to me, as I think some judges would find an abort-on-demand clause against public policy.

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Welcome Contracts Students!

As new 1Ls begin to immerse themselves in the wonderful world of law, we welcomed them here on this blog recently with an overview of the first-year curriculum that has been in place for ages. It concluded with a particular reference to the course on Contracts, about which I’ve recently published a new book connecting its classic cases and doctrines to contemporary contract disputes in popular culture and covered in the media.

From that book, Contracts in the Real World: Stories of Popular Contracts and Why They Matter, the following continues to provide a gateway into that field by introducing two legends whose venerable work on the subject continues to define the boundaries of recognized debate on most of the issues. The legends are Samuel Williston and Arthur Corbin.

In 1920, Williston, a Harvard professor, published a monumental treatise on the entire law of contracts, and updated it until his death in 1963. In 1950, Arthur Corbin, a professor at Yale, promulgated an equally magisterial and comprehensive treatise, based on earlier writings throughout his career.

These works—still kept up-to-date by successor editors—influenced generations of lawyers and judges addressing contract disputes. Williston’s philosophy dovetailed with that of the eminent jurist, Oliver Wendell Holmes, Jr., and Corbin’s resonated with that of the esteemed judge, Benjamin N. Cardozo.

Williston epitomized a formalist approach to law and reflected what some call the “classical” school of contract. It looks to whether parties in a transaction were giving and getting something, emphasizing a concept called “consideration” as the signal of an enforceable contract. This school of thought held unenforceable not only promises to make gifts or attend dinner but promises merely inducing another party to take some action.

In this view, the remedy for breach of a bargain is to pay the injured party money to put them in the same economic position they would have enjoyed had the other performed. This classical conception of contract law dominated well into the twentieth century, and remains a force today.

Corbin took a realist approach to law and offered a more pragmatic conception of contract. Though agreeing with Williston on many points, Corbin recognized, as courts increasingly did in the twentieth century, a wider range of circumstances that create contractual obligations. Williston’s bargain model of consideration remained, but loosened so that even some promises to make gifts could be enforced, so long as there was an identifiable return, like naming a college endowment. It recognized reliance on a promise as a basis of contractual liability, in a novel doctrine commonly called “promissory estoppel.”

Compensation for disappointed expectations remains the primary measure of remedy. But recognizing promissory estoppel gave equal dignity to measuring remedies by out-of-pocket costs incurred relying on a promise.

These twentieth century developments that Corbin captured, and helped to shape, reflected broader social developments as well, moving law’s orientation from a formalist to a realist conception. For example, classical contract’s relative strictness, limiting the scope of contractual obligation, was accompanied by an equivalent strictness of enforcement: if a contract was hard to get into, it was also hard to get out of. People could be bound to contracts that were made based on mutually mistaken assumptions or even where performance became impossible.

But as the ambit of contractual obligation expanded, so did grounds for excusing it, like mutual mistake about the terms of a trade, or impossibility of performance, such as a power outage in a rented banquet hall. Similarly, classical contract law venerated written records, limiting the scope of obligation to what was plainly meant within a document’s four corners. Corbin and his realist descendants were more willing to consider evidence supplementing these written expressions. Read More

Crowdsourcing the Interpretation of Terms of Service Agreements

This is an interesting project:

“I have read and agree to the Terms” is the biggest lie on the web. We aim to fix that. We are a user rights initiative to rate and label website terms & privacy policies, from very good Class A to very bad Class E.

ToS;DR is a young project started in June 2012. The data is subject to important changes. This is your opportunity to help us fix the “biggest lie on the web”: join us if you have information to contribute related to specific terms or if you have a comment!

ToS;DR aims at creating a transparent and peer-reviewed process to rate and analyse Terms of Service and Privacy Policies in order to create a rating from Class A to Class E. We need more legal expertise, please also join the working-group. We also need people to contribute source code. Everything is JavaScript and JSON. The data is freely available (CC-BY-SA) and ready to be used for other tools, like browser extensions.

I think aspects of this could succeed, and others will not. I will be following it closely. Hey, if Intex can work, why not this? [Via Jane Hu]

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Welcoming All 1Ls Across America!

Welcome all first-year law students to the wonderful world of law!  I teach Contracts at George Washington University (though I’m visiting at Fordham University this fall).  My students find it useful to begin our journey into that subject–which many find can be difficult–with a step back to look at the shape of the first-year law school curriculum.

It has not changed much in a century and does not vary widely among law schools today, from Cooley to Columbia.  I also try to be sure to connect the topics and examples appearing in today’s casesbooks (which have also not changed much over time and do not vary from school to school) to current topics in the news.  Students at other schools can share in these stories by obtaining a copy of my book, a fun supplement to the Contracts course,  Contracts in the Real World: Stories of Popular Contracts and Why They Matter.

Some thoughts about the shape of today’s 1L curriculum appear in the beginning of the book, including the following excerpt.  I summarize this for my students on our first day of class to give a sense of why today’s curriculum looks as it does and where contract law fits within it.

The curriculum dates to a legendary figure of nearly a century and a half ago.  In the 1870s, C. C. Langdell, as Dean of Harvard Law School, designed a simple way to organize the vast field of law still used to this day. He thought that underlying law’s complexity were a handful of basic ideas. Examining leading cases organized around these ideas would reveal law’s elements and rhythms.

Common law actions, meaning those courts resolve one by one, were of greatest interest to Langdell and dominate many 1L courses, including Contracts.  In the United States, following English traditions, common law is developed by state courts as disputes arise. Originally referring to law “common” to all citizens, today this system yields some variation among states, but general principles tend to prevail. Though the common law evolves as society and the economy change, judges draw on precedents when evaluating new cases—under the principle of stare decisis.

Langdell organized the welter of cases on numerous topics according to basic questions: how, what, and why. The question of how isolates the procedures private parties follow when resolving disputes using civil litigation. This is the practice of the lawsuit, arranged into the sub-field of study called civil procedure. Read More

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Do Deferred Prosecution Agreements Create Third Party Beneficiaries?

In the field of corporate criminal liability, no subject is hotter than deferred prosecution agreements (DPAs).   In these, prosecutors agree with target corporations to defer or refrain from prosecution in exchange for the target admitting allegations and committing to various reforms. Reforms invariably include enhanced internal compliance programs, and sometimes top-level governance changes.   Terms provide that if the government determines that the corporation breached, it can prosecute. Given the admissions, conviction then is almost certain.

Several rationales support these functional settlement agreements. These include avoiding the risk of collateral consequences of corporate convictions (such as customer defection and investor withdraws that could ruin a firm, as happened with Arthur Andersen in 2005).  They may also be valuable alternatives to straight-up criminal convictions or civil regulation when investigations give prosecutors firm-specific information about corporate defects that the agreements can cure.  There are thus both public law enforcement (deterrence) rationales and private corporate rationales (reducing agency costs when managers act against the interests of shareholders).

DPAs are age-old devices but have become popular in the US only the past decade: only a couple dozen were ever used before 2003, but nearly 200 have been formed since.  This summer alone, federal prosecutors around the country have entered into a dozen of them with various corporate targets.  England is now considering whether to follow this American development.

Many open questions exist. For example, suppose a company breaches the agreement, as Wright Medical was alleged to have done this week.  The contracts state the rights of prosecutors clearly–they may proceed with prosecution.  Many contracts, including the Wright Medical deal, are silent on another question: are there any third party beneficiaries as a matter of contract law?  Are shareholders intended third party beneficaries of DPAs?  The issue is the government’s intention in exacting the corporation’s promise.  If the rationale is general deterrence, probably not; but if the rationale is reducing agency costs, probably so.  Any opinions?

 

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Nominal Consideration at the Olympics

This is just bizarre:

“London Olympic organizers tell the Associated Press that the former Beatle [Paul McCartney] and other famous acts who participated basically “donated their time — receiving a mere pound ($1.57) — for their performances.” And that nominal fee was offered to make the Olympics contracts binding.”

If true, I take it that British law takes the position that nominal consideration can bind obligees, but that “false” nominal consideration can’t.  Thus, the organizers had to both promise to pay McCartney a pound and actually pay it before the ex-Beatle was bound to perform.

To my  mind, this is the least good resolution of the consideration problem possible.  Look: either consideration should mean something – bargained for exchange motivating actual counter-promising – or parties should be free to dispose of the requirement of consideration entirely.  In the United States, only Pennsylvania has taken that sensible latter position.  The rest generally tend to require actual bargained for exchange, excepting only charitable subscriptions, which the Olympics are not.  The Brits, who handed us this mess in the first instance, have apparently now embraced the unfortunate, mumbo-jumbo, hybrid, which reduces the sensible formality of consideration to a bit of a magical contract theatre.  Does anyone think that that pound of consideration actually motivated McCartney’s promise to perform?