Posted by: yarbel | 24th Sep, 2015

Charles Fried, Contract as Promise, 2.0 — Yonathan Arbel

Post by Yonathan Arbel

The second edition of Charles Fried’s foundational book ‘Contract as Promise’ is now out in print, and to celebrate the event, Harvard Law School held a special panel comprising of Charles Fried himself as well as other HLS professors.

The event itself was filmed and the YouTube link is appended at the bottom of this post. The panel discussion was great and Charles Fried untied many of the hard knots in the earlier edition of his book. His approach is neatly summarized in a new concluding chapter to his book, aptly titled ‘Contract as Promise in the Light of Subsequent Scholarship—Especially Law and Economics’, which clearly and fairly describes many of the critiques launched at his book, and presents his version of things.

In this post I will summarize some of the main innovations in his chapter, describe a few of the reactions from the panel, and offer a few of my own observations. I will say in advance that this is not a book review, so I will not have the space to fully explain or elaborate on some of the points made. I am not especially worried about it, however, as I am sure there will be a deluge of new papers reacting to the publication of the second edition.

The main move Charles Fried makes is ‘defaultization’, that is, he explains away many doctrines of contract law that seem contradictory to his promise gestalt as mere defaults rather than hard rules. To take the clearest example, the duty to mitigate harm doctrine would seem to run against a promissory approach, as it is ostensibly inconsistent for a wrongful breach to impose new obligations on its victim. Fried explains, however, that much of the puzzle disappears if we consider that this rule is mutable. The reason why we have this rule is because it is efficient and so most parties would presumably be interested in it (in a judoesque move, Fried borrows here from Law and Economics). We might be wrong, and in this case we let parties contract around the rule, but as a first approximation, the duty to mitigate is probably quite close to the parties’ actual will. A similar move is made with regard to expectation damages. To his critics saying that it is inconsistent for him to favor expectation damages, Fried replies that expectation damages is only favored because it tracks parties’ assumed will. Inasmuch as this is their assumed will, then it is this will that should be specifically performed. Hence, he favors specific performance but of the secondary obligation to pay damages. As a last example, the ‘four corners rule’, which discards extrinsic evidence on parties’ intentions and meanings, is explained as a cost-cutting mechanism the parties presumably want.

A second move is to reconceptualize private contractual transactions as involving the public institution of the court. That we have third parties coming in to the transaction and trying to understand it ex-post implies a few practical concerns. For example, Randy Barnett famously argued that contract law cannot be about subjective promises because it often imposes liability on the basis of objective manifestations, which may diverge from actual intent. To this answers Fried that yes, we are only looking at objective manifestations but that is solely because it is a method that is less prone to errors than an investigation into the souls of the parties. The method does not imply the substance of the investigation, and it is entirely coherent to look for subjective intention through objective manifestations, despite their limitations. Another result, and a more surprising one, is the treatment of consideration. Fried 1980 was overly critical of this element of contract law, admits Fried 2015. Today, he still believes that it is a poorly designed doctrine but he sees its value as indicating to the courts which obligations are worth its time. If the parties are interested in legal enforcement, they can do it through a process of exchanging considerations. What is intellectually engaging about this view is that it takes one of the most common attacks on consideration, its complete peppercorn malleability,  and makes it to be one of consideration’s strengths, for it allows easy opt in and opt out.

The panel discussion was also enlightening. Professor Einer Elhauge made an interesting comment. In his view, Fried is not Friedian enough! That is, Elhauge believes that Fried too easily concedes to law and economics, even when he has good responses. For example, much of the seeming deviations of contract law from the course of promise theory could be explained as what the parties really would have wanted had they taken the time to make their desires explicit.

Professor Florenica Marotta-Wurgler, visiting from NYU, brought her empirical expertise to bear. She described how consumer contracts are rarely read, which militates against a clear notion of autonomy and clear promises. Fried bit the bullet and agreed that he himself does not read many of the contracts he signs. He nonetheless believes that the fact that consumers care about some aspects of the contract – size of the product, length of warranty – suggests that there is an active choice. At the end of the day, he says, we must accept the dilemma imposed by the fact that people only partially read contracts.

Professor Randall Kennedy argued that if Fried seeks to explain the law as it is, then when it comes to consideration, his account stops short. Fried said that his revised understanding of consideration does account for it, and so while the doctrine is still poorly made, his account does not imply its wholesale rejection. Professor Allen Ferrell noted how Fried’s account often mixes deontological and consequentialist reasoning and argued that Fried should be much more in favor of specific performance. Fried replied that in his new account expectation damages are but a default. In fact, said Fried, people opt out of expectation damages all the time. When they buy a fridge, said Fried, people will often agree with the seller that in the case of a defect, a replacement unit will be sent.

Finally, Professor Ruth Okediji, visiting from the University of Minnesota, challenged Fried’s liberal acceptance of promises that are immoral or unjust. This is an interesting critique, given how Fried describes his thesis as “avowedly moralizing”. She brought the example of Williams v. Walker-Thomas Furniture as a case where Fried’s approach would imply enforcement despite the basic unfairness of the situation and its lopsided nature. Fried stated that such deals may seem lopsided to the outsider, but it will be equally unfair for a consumer to demand a high level of service if the price she pays is low. Fried also explained his new conceptualization of doctrines such as unconscionability, under which the law does not make it illegal for people to engage in certain unconscionable transactions, but solely refuses to lend its hand in enforcing them.

 

I find much of Charles’ Fried new approach exciting and engaging and it gives a lot of meat for a new generation of scholars to chew on. A few of my own comments are:

 

  1. In a recent empirical paper I find that specific performance is often under-compensatory relative not only to what was promised in the contract but also relative to expectation damages. This provides a strong reason, I believe, for contract law to depart from this remedy. Moreover, I find that a lot of what remedies do is confer various strategic advantages in litigation; as I note there, it is hard to see how a theory of promise would entitle a party to these litigation boosts.
  2. Most of the contracts we see in the world are B2B , B2C (business to business and business to consumer, respectively), and as Professor Marotta-Wurgler’s work shows, consumer 2 computer (and soon enough, computers to computers…). In this brave new world, to what extent do we care about contract as promise? After all, a theory of promise imagines autonomy, trust, the freedom to author one’s life, respect for persons, the potential for disappointment, etc. but it requires a lot of creative theory to endow, say, Comcast or my desktop computer, with any type of moral agency. This critique is somewhat foundational, as Fried explains that the whole institution of promise depends on respect and trust (p. 138). You can hear me asking this question in the video and Fried’s response.
  3. The ‘defaultization’ strategy is interesting and illuminating. However, it has its limits. There are various types of default rules and majoritarian ones are but one of them. The big-foot of contact law, penalty default rules, rumored to exist but only caught on fuzzy recordings, present a challenge to this view. Another challenge is doctrinal: courts do not happily allow parties to opt into specific performance (§ 359 R2K cmt a), enforce penalty clauses (Fried considers this judicial hostility to penalty clauses a legal mistake, which is in tension with the analytical part of his project), or opt-out of good faith requirements. More threatening is the contingent nature of defaults. For Fried’s argument to work it is not enough to show that today expectation damages, for example, is a good guess of most parties’ will, but that it has been historically the case throughout the decades and geographically throughout the nation. How likely it is the Iowa farmers and NY businessman alike in the 20s, 60s, or 90s, thought that expectation damages is superior to specific performance or restitution is a guess, and somewhat wild one, given how indeterminate the law and economics literature is on the general superiority of remedies.

 

Responses

It seems to me, and I apologise if this is not original, that the key objection to enforcing party agreed specific performance provisions is that those impose costs and obligations on non-parties. Those non-parties are the rest of us who underwrite the supervisory activity of the Court and pay for incarcerating defaulters

[…] “The second edition of Charles Fried’s foundational book Contract as Promise is now out in print, and to celebrate the event, Harvard Law School held a special panel comprising of Charles Fried himself as well as other HLS professors. The event itself was filmed and the YouTube link is appended at the bottom of this post. The panel discussion was great and Charles Fried untied many of the hard knots in the earlier edition of his book. His approach is neatly summarized in a new concluding chapter to his book, aptly titled ‘Contract as Promise in the Light of Subsequent Scholarship — Especially Law and Economics’, which clearly and fairly describes many of the critiques launched at his book, and presents his version of things …” (more) […]

@Haward, this is a very important objection and, indeed, one that is commonly emphasized by courts and scholars alike.

What I try to emphasize in my own work is that enforcing money judgments is also expensive and that this cost is, too, partially borne by the public purse.

Another thing that I try to focus attention on is that the court does not have to supervise performance at all. It may simply judge the quality of performance ex-post and this is not qualitatively different from judging whether a financial obligation was made in full, at least when there are clear standards by which to judge the quality of performance.

Incarceration would have been troubling had it not been so rare. Moreover, there may be some complications with respect to money judgments (think hiding money) that can lead to incarceration as well.

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