Freedom, Choice, and Contract

Papers 

Abstracts

The Joint-Maximization Theory of American Contract Law

Jody Ponsa Kraus & Robert E. Scott

This paper does not offer a complete normative theory of contract. Rather, our goal is more modest —to begin the project of setting out the best internal theory of American contract law as it is practiced in the United States and enforced through the actions of U.S. courts. The core principle that undergirds American contract law is the legal enforceability of bargained-for executory promises. From its birth at the end of the 18^th century, the executory promise has become the dominant mechanism enabling parties of all types—business persons, individuals, consumers and even married persons—to engage in meaningful collaborative activity. This principle together with the core doctrines comprising American contract law are best explained as legal means for maximizing the value of joint projects.  Most courts interpret and apply contract law consistently with this understanding.  But some courts err by treating contract law as also serving, rather than being merely constrained by, other important social objectives.  These courts perversely undermine contract law’s singular objective while simultaneously disserving the diverse, competing social values they seek to advance.  Doctrines limiting enforcement to voluntary, honest agreements between competent adults underwrite the joint maximization objective.  Doctrines licensing courts to alter or abrogate the terms of those agreements reflect norms that, in effect, comprise an external regulatory constraint on freedom to contract, so conceived.  The content and extent of extra-contractual regulation varies from context to context, ranging from its nadir in commercial contracts between sophisticated parties and to its zenith in consumer contracts.  While the joint maximization theory explains and defines the doctrinal core of contract law, the varied regulatory apparatus surrounding contract law determines its limits.  Sorting the doctrines loosely regarded as part of contract law into those that define its core and those that limit its scope unifies contract under a single principle while locating other, competing values in the extra-contractual regulatory framework.  Joint-maximization provides a powerful theory of contract that directly informs disputes over the nature, content, interpretation, and application of core contract doctrines, unifies these doctrines under a single rubric and isolates the distinctive values that either underwrite or limit contract law.  The case for or against applying or limiting contract law in any given case, then, turns on the case for these competing values, as they are expressed in the relevant contractual and extra-contractual doctrines.  And the case for contract law itself turns on whether contract law and the extra-contractual regulatory framework yield an overall legal framework that passes muster under a theory of political justification.  Previous efforts to ground American contract law and the joint maximization criterion on an economic efficiency rationale have relied on the claim that the state pursues social welfare goals. The error of both the efficiency theorists and their critics is in failing to see that contract law is party-centric: contract law is solely concerned with vindicating the choices of individual parties and does not engage any purposes other than joint maximization.

Contract as Promise: No Regrets

Charles Fried

In their new book The Choice Theory of Contracts (2017), Hanoch Dagan and Michael Heller state that by arguing "that autonomy matters centrally to contract," Contract as Promise (1981) makes an "enduring contribution . . . but [its] specific arguments faltered because [they] missed the role of diverse contract types and because [it] grounded contractual freedom in a flawed rights-based view [apparently related to if not derived from a Kantian view of legal and moral obligation] . . . We can now say all rights-based arguments for contractual autonomy have failed."  The regrettable effect of this failure to justify autonomy as the central feature of contract theory is that "if freedom drops away . . . then what is left, mostly, is the efficiency [law and economics] approach."  In their concise and lucid volume, the authors conclude that their proposed choice theory "approach returns analysis to the mainstream of twentieth-century liberalism–a tradition concerned with enhancing self-determination that is mostly absent in contract theory today."  Perhaps the signal flaw in Contract as Promise they sought to address was the failure to account adequately for the role of the state in enforcing contractual undertakings–a role that must counterintuitively be freedom enhancing even when enforcing performance against a promisor’s will.  Dagan and Heller further point to other flaws of the promise principle in enforcement (often) according to objective not subjective understandings of the parties' intent, the selection of remedies, and the homogenization of all contract types under a single paradigm.

     In this essay, I defend the promise principle as the appropriate paradigm for the regime of contract laws.  Along the way I defend the Kantian account of this subject while acknowledging that state enforcement necessarily introduces elements–both normative and institutional–for which that paradigm fails adequately to account.  Of particular interest and validity is Dagan's and Heller's discussion of contract types, to which the law has always and inevitably recurred. They show how paradoxically this apparent constraint on contractual freedom actually enhances freedom to contract.  I discuss what I have learned from their discussion and why I am glad to embrace it.

Voluntary Obligation and Contract

Aditi Bagchi

Dagan and Heller rightly celebrate choice in the domain of contract.  Choice is a better focus than voluntariness as such, because it more readily allows that the most normatively attractive dimension of contract is not binary.

     Indeed, choice is less characteristic of the practice of contract than their account, and other dominant accounts of contract, may presuppose.  The normative powers we exercise in contract are under considerable material and moral constraint.  Our choice to exercise them, and how, is less voluntary than we usually associate with the exercise of normative power.  We could aim to enhance voluntariness by expanding contractual choice but increasing contractual options for some people will reduce options for others.  Because the assumption of ex ante choice justifies in part the deference that both judges and legislators afford private agreement, that deference should be adjusted.

The Parol Evidence Rule: Wigmore, Consumer Contracts, and the Mechanics of Choice

Gregory Klass

The Choice Theory of Contracts makes a strong case for paying attention to parties’ ability to choose terms. The book says less about the mechanics of choice: the legal rules that govern how parties exercise their power to choose and how adjudicators identify what they have chosen. In contemporary contract law, the parol evidence rule plays a key role in all this. An integration clause tells adjudicators how to us a writing to identify the terms that the parties have chosen. Integration itself is a matter of party choice—a writing is integrated only when the parties have agreed that shall be. And the rule tells parties inter alia how to exercise that choice—what they need to say or do to integrate a writing. An examination of the origins of the modern parol evidence rule together with some recent developments illustrates the importance of attending to the mechanics of choice, and the different ways a commitment to party autonomy plays out across different contracting contexts.

     Thayer’s early, non-evidentiary account of the rule traced it back the idea of a carta—a legally dispositive document such as a judicial order, decree, will, or deed. Although Thayer’s approach explained the integration of formal contract, it did not explain the integration of informal ones. Wigmore extended Thayer’s account with the idea of jural acts: acts that effect a legal change by the expression of an authorized speaker’s intent to effect that change. Wigmore treats integration as a jural act. In informal contracts, the writing is legally dispositive only because the parties have expressed their shared intention that is shall be. This is the origin of the modern, autonomy-based parol evidence rule. The rule increases party autonomy by giving them greater control over how adjudicators will identify the terms of their agreement.

     The Draft Restatement (Third) of Consumer Contracts would effect a major change to the rule in consumer transactions. Although the Draft provides that standard terms are presumptively integrated, other provisions all but eviscerate the effects of integration. Standard terms are not integrated to the extent that they contradict or unreasonably limit an extrinsic affirmation or promise that is part of the basis of the bargain. Such affirmations or promises become part of the contract, even if the standard terms provide otherwise. And extrinsic statements at odds with standard terms can also be deemed deceptive. If Wigmore’s modern rule gives parties the power to determine the legal effect of their writing, the new Restatement would largely take that power away in consumer transactions.  But though the proposed rule departs from Wigmore’s, it too is autonomy enhancing. Familiar facts about how consumers make decisions entail that strict application of the parol evidence rule does not expand consumer autonomy, but reduces it. A smaller menu enhances consumers’ ability to choose. 

Choice within the Exchange Structure

Richard R.W. Brooks

Across all societies people rely on elemental modalities or models of exchange. They use these models, Alan Fiske argues, “to plan possible actions and anticipate others’ future actions, and above all to coordinate action so that dyads and groups act in concert—undertaking complementary actions that mesh” and that make sense of exchanges, from acceptable means persuasion and negotiation beforehand to permitted critiques, excuses and sanctions when exchanges fail to occur as planned.  These modalities form a structure or framework of exchange, wherein law plays a key role in constraining, expanding and refining the mesh and sense-making of exchanges.  Considering Hanoch Dagan’s and Michael Heller thoughtful book, The Choice Theory of Contracts, from this perspective, allows us to situate contract law and its capacity to influence autonomy (as well as community and efficiency) through choice within this broader framework.  Law itself, one immediately sees, faces constrained choices within the established framework of exchange. Recognition of this basic point reveals law’s limits, but also its fealty to community, efficiency and, of course, autonomy and freedom.

On the Optimal Number of Contract Types

Oren Bar-Gill and Clayton P. Gillette

In many spheres of contract – including consumer contracts, employment contracts, commercial transactions and more – the content of the contractual obligations is not determined through term-by-term negotiation and drafting. Rather, parties choose from a pre-set menu of contract forms or types. Indeed, some scholars – notably Dagan and Heller (2017) – argue that autonomy, as well as efficiency, manifests primarily through the choice among contract types. This argument raises a series of important questions: What is the optimal number of contract types? Can we expect the market to produce the optimal number of contract types? And, if not, should the government intervene in attempt to create an optimal menu of contract types?

     We begin by emphasizing the difficulty in identifying the optimal number of contract types. In a world without information costs (and other transaction costs), the optimal number of types would be equal to the total number of contracting pairs, since each pair of contracting parties will have (at least slightly) different preferences and constraints. In the real world, information costs (and other transaction costs) suggest that the optimal number of types is much smaller. The argument here traces, in large part, the theory of modularity in contracts (Smith 2006).

     We next turn to a descriptive account of markets for contract types and of market failures that might produce a suboptimal number of types. We argue that standard problems, including externalities, imperfect information and imperfect rationality, might prevent markets from producing the optimal number of contract types. The argument here borrows from existing accounts of why markets might produce suboptimal contract terms. Dagan and Heller (2017), while acknowledging these standard market failures, claim that a more fundamental reason why markets are expected to produce a suboptimal number of contract types is that these markets do not capture non-efficiency values, specifically, what Dagan and Heller refer to as “community.” We take issue with this claim. We argue that markets reflect any value that market participants care about. And, to the extent that community values are not represented, it is because of the standard market failures, especially, externalities.

     Finally, accepting that markets might produce a suboptimal number of contract types, we ask whether government should intervene and try to remedy this market failure. We argue that, in many cases, government would have insufficient information to even identify an insufficient types problem, not to mention solving the problem. In addition, standard political economy problems suggest that governmentally produced contract types might be constrained in number or quality. Specifically, contract types desired by groups capable of exploiting governmental processes could be unbalanced while contract types desired by groups less capable of exploiting governmental processes will be undersupplied.  Still, in appropriate cases, soft, nudge-type interventions may be desirable. Default rules (e.g., plain vanilla mortgage contracts) and safe harbors (e.g., the qualified mortgage) present the most promising regulatory tools in this area.

References

Dagan, Hanoch, and Michael Heller. 2017. The Choice Theory of Contracts (Cambridge University Press).

Smith, Henry E. 2006. Modularity in Contracts: Boilerplate and Information Flow. Michigan Law Review, Vol. 104, No. 5, "Boilerplate": Foundations of Market Contracts Symposium, pp. 1175-1222.

Contract Law and the Liberalism of Fear

Nathan B. Oman

In The Choice Theory of Contracts (CTC) Hanoch Dagan and Michael Heller offer a novel theory of contract law that seeks to ground its normative foundations in a robust political morality centered on the ideal of human autonomy.  CTC takes its normative bearings from the perfectionist liberalism of Joseph Raz, which sees the primary purpose and duty of the state in terms of expanding the menu of choices available to citizens.  By placing autonomy at the center of normative analysis, the menu of choices becomes in some sense morally prior to any of the ends that might be pursued by particular choices.  The implications of this stance are elegantly articulated by CTC.  The result is a contract law that is both more imperialistic – large swaths of legal doctrine often not thought of as primarily contractual now become part of “contract law” – while at the same time being far more diverse and less unified in terms of its doctrinal structure. 

     Autonomy, however, is by no means the only basis for allegiance to a liberal political order.  Approaches loosely associated with what Judith Shklar has called “the liberalism of fear” provides a far less ambitious vision of liberalism.  On this view, the purpose of liberal political institutions is not to maximize individual autonomy.  Indeed, one need not accept human autonomy as a moral desideratum per se to defend liberalism.  Rather, the virtue of a liberal society is that it provides the best hope for peaceful co-existence among those with deeply felt – and often deeply illiberal – moral commitments.  The liberalism of fear also has implications for contract doctrine.  In particular, I argue that it supports a more modest vision of contract law, one that properly places market transactions at the center of legal doctrine.  As for the new domains brought within the gambit of contract law theory by CTC, a liberalism of fear would be far more content to see these areas of law as ad hoc accommodations to social realities rather than special incarnations of an overarching and almost all-encompassing vision of autonomy and contract.

     This essay will conclude with some observations on why the illiberalism that has swept much of the United States and Europe in recent years may provide renewed reasons for preferring a “liberalism of fear” and with it a more modest, commercially-oriented view of contract law.

The Unity and Complexity of Contract Law: General Principles and Transaction Types

​Peter Benson                                       

Among contract theories, certain emphasize the unity of contract law whereas others underline the multiple forms of contracting that are available to parties. I start from the premise that contract law has general principles but that at the same time it recognizes distinct transaction-types, to use Llewellyn’s phrase, each with its own features, incidents and underlying assumptions. The challenge is to account for this multiplicity within a unified and general theory of contract law. The Choice Theory of Contracts by Dagan and Heller represents an important and ambitious effort to do just that.

     A main purpose of my paper is to discuss in detail their view of the general basis of contractual obligation and of how, on this basis, there are – and indeed should be – many contract types. The fact that the authors seek to connect these two aspects is an important theoretical advance relative to most theorizing about contract. On the one hand there are promissory or autonomy-based theories that standardly begin with a fundamental principle that provides no reason or basis for recognizing qualitatively different transaction types.  On the other hand there are pluralist theories that begin with this very multiplicity of contract types and group them, without providing any genuine unity or foundation, as separate instances of some general, virtually open-ended conception of cooperation. Most theories begin therefore with the one or the many but provide little or no explanation as to why there should be these two dimensions in the first place, what they consist in or how they interconnect, let alone cohere. 

     The Dagan-Heller account rests on a teleological justification of contract that sees contract law as power-conferring rather than duty-imposing. The provision of a multiplicity of contract types fulfills contract’s basic and unifying power-conferring purpose. In the first part, I raise certain difficulties with their account and argue that, as a starting point, it is crucial to try to specify clearly the basic kind of relation that, according to settled legal doctrines and principles, must characterize any and every contract. Following this critical evaluation, I discuss the features and normativity of what I argue is the basic contractual relation and suggest how this relation can be further specified as – and shown to be the foundation of -- a plurality of transaction-types which fully lend themselves to the kind of judicial reasoning that Llewellyn famously called “situation sense”.

Money Talks: Institutional Investors and Voice in Contract

Roy Kreitner

Contracts are the building blocks of markets, where participation is typically understood through choice: to buy or not to buy, and if so, from whom? In other words, contract choices allow participation by exit, with little need for discussion. However, in some instances markets may be open to a fair degree of voice. Market behavior is not always a take it or leave it endeavor, and market participation does not always entail the kind of passivity associated with the role of the price taker. At least when some contract parties put their minds to it, markets may retreat from the mechanics of pure preference satisfaction and interact with a realm of reasoned deliberation, where some market reasons are significantly public minded. This essay explores the potential of contracts to become a locus of deliberative participation in the context of institutional investment (primarily by pension funds) and investors’ pursuit of commitments to non-financial goals.

Who Owns What?

Daniel Markovits and Alan Schwartz

A now-conventional view distinguishes between legal entitlements that are protected by property rules and entitlements that are protected by liability rules.  A property rule protects an owner from every involuntary expropriation of her entitlement.  Property rules thus are thus conventionally associated with injunctive relief:  examples include an order of replevin allowing a plaintiff to recover a particular item of personal property following a conversion and an order of ejectment allowing a plaintiff to regain possession of real property following a trespass.  A liability rule, by contrast, does not guarantee an owner's possession of the entitlement itself but only of the entitlement's value.  Accordingly, where an owner enjoys only liability rule protection, others might expropriate her entitlement even without her consent, as long as they pay her a sum, to be determined by a third party (conventionally, although not necessarily or even dominantly, by a court).  Liability rules are thus conventionally associated with money damages:  with “just compensation” in property, reliance remedies in tort, and the expectation remedy in contract.

     The distinction between property rules and liability rules can be sensible only in the shadow of a prior legal choice about entitlements.  Before one can intelligibly ask whether an entitlement is or should be protected by property rules or by liability rules, one must determine the attributes that constitute the entitlement in question.  Specifically, one must determine whether the entitlement gives its owner a legally enforceable right to a thing itself or only to the value of the thing, as fixed by some third party.  This insight reveals that changing the content of an entitlement, while holding the style of protection that the entitlement receives constant, can be equivalent to changing the style of protection that an entitlement receives, while holding the content constant.  Every owner's legal position may thus be described in two ways:  as involving property rule protection for an entitlement given one substantive content; and as involving liability rule protection for an entitlement given a different substantive content.

     This formal result matters substantially to legal practice whenever the determination of the content of an entitlement on the one hand, and, on the other hand, the choice of the style of legal protection that the entitlement receives are made by different legal actors.  And in these cases, our insight ceases to concern only descriptions of the world and instead becomes highly consequential for how the world itself is.  This is especially so when the content of an entitlement is chosen by private persons, including the entitlement's owner, whereas the style of protection for any entitlements, not matter how constructed, is fixed by legal institutions, most notably courts and legislatures.  Contractual entitlements and also entitlements conventionally called "property"--especially productive property held by beneficial owners through legal vehicles such as corporations—present instances of this pattern.  Analyzing these cases reveals that the commonplace answers to the question "Who Owns What?" are mistaken.