Post by Erik Hovenkamp.
In the private law workshop’s final meeting of the fall semester, we were pleased to host Professor Todd Rakoff, who presented his recent article, “The Five Justices of Contract Law.” Rakoff begins by summarizing the conventional wisdom on the role of justice considerations in contract. These accounts portray justice as having a fairly narrow ambit, taking a backseat to notions of efficiency and the freedom of exchange. As an extreme example, Rakoff highlights the tendency of some law professors to regard justice considerations as being relegated entirely to the rarely successfully invoked doctrine of unconscionability.
In Rakoff’s view, such characterizations markedly understate the extent to which contract law is shaped by the courts’ pursuit of justice. He contends that justice considerations have had a significant influence on many common law doctrines, including some remedial standards, and that this is borne out in both the case law and the Restatements. He synthesizes this broader role of justice into five distinct applications, the eponymous “Five Justices.” Aside from characterizing these applications independently, Rakoff discusses instances in which they may conflict or overlap.
The first and most familiar application of justice centers on the equality of what is exchanged between contracting parties. Rakoff distinguishes between a strong form of this principle—one that would require something approaching an equality in the gains from an exchange to render it enforceable—and a weaker variant that merely condemns dealings with a gross disparity of value (which may involve one party being made worse off by the contract). He explains why the latter is more sensible, and far more consistent with doctrine. Indeed, it is essentially this principle that underpins the doctrine of unconscionability.
The second notion of justice arises in contracting under uncertainty, where the parties must necessarily allocate risk. An example is an insurance contract, which stipulates a payment obligation under certain circumstances that may or may not arise before the contract expires. In such cases, Rakoff contends, the role of justice is to ensure an “honest wager”—or, put differently, to condemn bargains that are “rigged” in the sense that the uncertainty is systematically predisposed to resolve itself in one party’s favor. An example is a seller who, having received a purchase offer from a buyer, withholds a response for several months. The courts have held that such prolonged silence must trigger an acceptance, for otherwise the seller could spend the intervening period searching for a better deal, while the offeror remains on the hook in the event that the seller does not find one.
A third application of justice arises in disputes over contracts with vague or ambiguous terms, requiring a court to impute a more precise meaning to such terms. Here, Rakoff contends, the role of justice is to choose “the term that fits”—that which best comports with the reasonable expectations of the parties, as indicated by the nature of their agreement. This prevents either party from wielding the vague term opportunistically. A famous example arises in Lady Duff-Gordon, where a fashion designer gave her agent the exclusive right to market her designs. Although the contract did not expressly impose a duty on the agent to make reasonable efforts to market the designs, Judge Cardozo’s opinion held that such an obligation could be inferred on the ground that the designer would not have supplied exclusive agency on terms that left her at the mercy of the agent’s decision whether to devote energy to marketing.
Rakoff’s fourth Justice centers on desert, and emphasizes the importance of assuring a fair return for a party who undertakes a costly activity for another party’s benefit. Invocations of this principle seem to focus on situations in which standard applications of black-letter contract law would elicit a perverse result by failing to provide any meaningful return to a party who, for one reason or another, seems to deserve one. Certain instances of promissory estoppel fit this model.
The final application of justice arises in situations where one party is able to take advantage of certain unanticipated circumstances, providing leverage with which to give itself a disproportionately valuable outcome at the other party’s expense. A familiar instance of judicial nonenforcement of otherwise valid agreements concerns agreements made under duress. Likewise, an aspiration to defeat opportunism lies behind the adoption in many states of statutes that forbid sellers from charging exorbitant prices for basic necessities during natural disasters.
My impression is that most or all of these distinct forms of justice ultimately trace back to the notion of parity—or at least the absence of gross disparity. However, even if that is the case, Rakoff’s article nicely articulates the distinct ways that this more general notion manifests itself throughout contract law, given the myriad ways that gross disparities can arise in practice. Further, I think the article plainly succeeds in its contention that justice considerations play a larger role in contemporary contract law than conventional academic wisdom typically concedes.