Post by Henry Smith
At last month’s American Law and Economics Annual Meeting, I attended a very interesting session on Commercial Law and Contracts, at which the first two papers were in tension with each, as were their authors – in a polite way! The first was “The Common Law of Contract and the Default Rule Project,” by Alan Schwartz and Bob Scott. They argue that the program over the last century by academics, codifiers, and Restaters (“drafters”) to supply transcontextual defaults rules that apply in a wide variety of contracts was doomed to fail. Common law contract supplied a limited number of defaults that do have this feature, such as expectations damages for breach of contract. Going beyond these traditional rules faced the drafters with a dilemma. They did not have knowledge enough to supply defaults that would make sense for particular industries. So they chose the transcontextual route, but to create additional defaults here required them to fudge the content, opting for fuzzy or underspecified standards based on custom and reasonableness, and commercial parties have not been receptive to these efforts, often opting out of them.
The second paper was “Rethinking Jacob & Youngs v. Kent,” by Vic Goldberg, who revisits this chestnut and digs out additional information that casts new light on the lessons it holds for contract theory. Recall that in that case, 129 N.E. 889 (N.Y. 1921), a homeowner wanted to refuse the last payment on the construction of what Goldberg terms a “serious mansion” (the above picture was presented) on the grounds that the contract called for Reading pipe and the builder had used Cohoes. The latter was equally good and it was customary to designate a grade of pipe by reference to a brand. Among the nuggets Goldberg unearthed is the fact that two trials were held and that the architect’s certificate (not signed here) was not essential under New York law at the time. More centrally, he shows that Judge Cardozo’s opinion, holding that the payment was due, was not innovative but consistent with a long line of New York cases. What Cardozo did was spell out a system of presumptions:
Intention not otherwise revealed may be presumed to hold in contemplation the reasonable and probable. If something else is in view, it must not be left to implication. There will be no assumption of a purpose to visit venial faults with oppressive retribution.
. . . This is not to say that the parties are not free by apt and certain words to effectuate a purpose that performance of every term shall be a condition of recovery. That question is not here. This is merely to say that the law will be slow to impute the purpose, in the silence of the parties, where the significance of the default is grievously out of proportion to the oppression of the forfeiture. The willful transgressor must accept the penalty of his transgression. For him there is no occasion to mitigate the rigor of implied conditions.
129 N.E. at 891 (citations omitted). Contrary to Schwartz and Scott’s longstanding opposition to this opinion, Goldberg approves of it, noting that the opposite holding would invite contractual parties like Kent to find something else to point to in order to refuse payment.
This last observation of Goldberg’s seems to me to hold the key to defusing the apparent conflict. Allowing one party to fasten onto a literal reading that producing an extreme result invites opportunism. As I have argued elsewhere, one function of equity was to counter opportunism. I think Cardozo was attempting to domesticate equity into the common law after the merger of law and equity. In this, the opinion is comparable to but more successful as an act of fusion than Riggs v. Palmer (the murdering grandson). The concern with opportunism and the use of disproportionate hardship as a trigger to set the presumption against the possible opportunist make the opinion in Jacob & Youngs v. Kent an example of “functional” equity in the post-fusion era. Interestingly, Schwartz and Scott are willing to countenance a limited role for equity, although they are skeptical that courts with a roving commission to root it out will be successful. At any rate, Cardozo’s opinion is mostly innovative in trying to fit a rather traditional version of the equitable function into a unitary system of law. How far that equitable function should be carried is a good question for another day.
Very interesting. Two questions
1. I’m intrigued by the comment that Jacobs & Young is more successful than Riggs v. Palmer and would like to know more about why. Is it because the latter deals with a well-defined and fairly singular problem that can be–and generally is–addressed by statute? The argument, I imagine, would be either that it is easier to deal with the problem without resorting to ex post tinkering or that there is less of a problem of seeking out and manufacturing legal technicalities, or both. Or is it because statutes seem to deal with a wider range of problems–and, as you would say, are addressed to a wider audience of duty-holders than specific contractual obligations–so that the need for definiteness necessary to enable individuals to plan their affairs is greater? Or is it something else?
2. If Jacobs & Young was rightly decided, can anything be said for the Schwartz/Scott thesis? If it is true that transcontextual default standards can be desirable in contract law, are there limits to the idea, other than simply avoiding standards that are too indefinite, either in the structure of Equity (with a capital E) or in terms of certain paradigms or categories of problems where they might be applied? Put differently, is there something different about the Reading pipe problem from the kinds of default standards Schwartz & Scott identify? I think you might say the answer is opportunism, or bad faith manipulation. But I’m curious to know more.
Thank you, James. Those are both excellent questions. Here are some thoughts.
1. On Riggs v. Palmer: There is, as your post indicates, a lot going on here, and commentators have had many very different things to say about it. My take on the case is that it is an overly self-conscious and overdone example of the fusion (or “merger”) of law and equity. Judge Earl invokes and equitable maxim (no profiting from one’s own wrong or crime) and ostentatiously labels it as “common law.” More substantively, I wonder whether his remedy – invalidating the transfer to grandson Elmer – is a result of trying too hard to be “common law.” An equitable alternative would have been to use a constructive trust: the transfer to Elmer is valid, not void, but he is subject to a constructive trust in favor of the grandfathers’ daughters. This solution, advocated by Jams Barr Ames in his analysis of the case, has advantages when it comes to third-party purchasers from the wrongdoer and it is more flexible in terms of where the court can direct the property. (I have a brief discussion of the case in this short paper on fusion, but there is more to say.) I am not claiming that it is necessarily better to handle the slayer problem this way, rather than as a matter of statute. Some combination of the two might be best, but I’m still working on it. Which brings me to . . .
2. Is the holding in Jacob & Youngs v. Kent consistent with Schwartz and Scott’s skepticism about the default rule program?: I think so, but my guess is that Schwartz and Scott would say no. To me, the intervention that Cardozo was trying to implement is very different from a transsubstantive default standard. My idea is that the equitable function is second order – law about law – and is only triggered exceptionally. Here the disproportionate hardship and the unusualness of the desire for Reading pipe are the trigger for a reversal of the presumption in favor of the transaction. Yes, some have called this some kind of penalty default rule. However, it is unlike the kind of defaults that Schwartz and Scott are criticizing, which are not second order in the same way. They simply fill in content in the ordinary workings of contract law. Schwartz and Scott do seem to be fine with very exceptional equitable interventions that have no precedential value (which was true of equity a long time ago). There is a spectrum here and I would be somewhat more generous than they would, but I don’t think that the “second order” triggers-for-presumptions approach leads to a general do-the-right thing standard or gives the courts a commission to detect opportunism all the time (as they rightly worry about). Much rides on whether one see the triggers like disproportionate hardhip as having limiting content. As I describe it in this paper, the kind of equity I have in mind bears a strong resemblance to the theories of unconsionability offered by Arthur Leff and Richard Epstein. This is no coincidence: unconscionabilty doctrine derives from the equity courts’ perennial struggle with “constructive fraud.”