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.