ContractswithConsent

合同的合意

THE UNIVERSITY OF TEXAS

SCHOOL OF LAW

Law and Economics Working Paper No. 020

February 2004

Contracts with Consent: A Contextual Critique

of the No-Retraction Liability Regime

Ronald J. Mann

The University of Texas School of Law

This paper can be downloaded without charge from the

Social Science Research Network Electronic Paper Collection:

http://wendang.chazidian.com/abstract=511245

An index to the working papers in

The University of Texas School of Law Working Paper Series

合同的合意

February 27, 2004 Draft

CONTRACTS WITH CONSENT: A CONTEXTUAL CRITIQUE

OF THE NO-RETRACTION LIABILITY REGIME

Ronald J. Mann

I. Two Regimes.................................................................................................................................1

A. Before Consent.........................................................................................................................3

1. How Important Is Opportunism?........................................................................................4 2. The Problem of Excessive Reliance.................................................................................11 3. Credible Promises Before Consent..................................................................................12

B. After Consent..........................................................................................................................15

1. Indefiniteness...................................................................................................................16

2. Misunderstanding.............................................................................................................18

3. Intentional Incompleteness...............................................................................................18

II. Problems with Opting Out..........................................................................................................19

A. Overenforcement....................................................................................................................20

B. Information-Forcing Defaults................................................................................................20

C. Untrammeled Freedom from Contract...................................................................................21

III. Conclusion...................................................................................................................................22 William Stamps Farish Professor in Law, University of Texas School of Law. I thank Allison Mann for tireless inspiration, aid, and counsel, Dick Craswell, Mark Gergen, Dan Keating, Doug Laycock, Alan Rau, Jane Stapleton, and Jim White for helpful comments, and Omri Ben-Shahar for giving me the opportunity to share my views on these questions.

合同的合意

My friend and former colleague Omri Ben-Shahar has established a reputation for providing nuanced and well-grounded applications of economic analysis to important problems of contract law. In recent years, he has undertaken the ambitious task of exploring a significant topic at the boundary of contract law: liability for problems that arise out of efforts to form a contract. The paper to which I reply, Contracts Without Consent: Exploring a New Basis for Contractual Liability,1 is his second paper on that topic, following his 2001 paper with Lucian Bebchuk on Precontractual Reliance.2 Collectively, these papers provide a comprehensive analysis of the relation between opportunistic behavior and contract law.

My goal in this reply is not to challenge that analysis directly, but rather to test its boundaries. As a thematic matter, I discuss the practical domain in which the proposed new basis for contractual liability is useful, and examine the plausibility of the doctrinal solutions that Ben-Shahar proposes. I first discuss the propriety of using a single regime to resolve preconsensual and postconsensual problems. I then consider whether the characterization of his proposal as a default rule responds to the concerns that I raise in the first part of my discussion.

I. Two Regimes

The most elegant aspect of Ben-Shahar’s paper is its use of a single model to resolve problems arising along a continuum, starting at the point where parties begin to consider a transaction and running through to the period after they have come to a formal agreement. Although that unified model is provocative, I do not think Ben-Shahar has made a case for it. On the contrary, however passé it might seem to provide a defense of a long-standing doctrinal framework, I argue that the existing framework reflects real and important functional distinctions, which Ben-Shahar’s proposed framework cannot readily accommodate.

The proposed regime rests on a considered rejection of the significance of any specific moment at which negotiating parties intentionally and consciously agree to be bound by a contract. Thus, in this regime, the date of the closing ritual is of no special importance. Specifically, this regime would discard aspects of the existing framework that provide a discontinuous shift from one liability regime before that moment of closing (principally tort-based liability for bad-faith negotiation)3 to a different one after that moment (expectation 152 U. Pa. L. Rev. __ (2004).

231J. Legal Stud. 423 (2001). Cal. L. Rev. 1743, 1811-13 (2000)(discussing cases in which a party’s conduct resulted in a court imposing a duty to negotiate in good faith, even when no such commitment arose through agreement); E. Allen Farnsworth, Colum. L. Rev. 217, 269-85 (1987)(listing several courses of conduct that courts have held to be “unfair dealing” in precontractual negotiations, such as improper tactics and non-disclosure).

合同的合意

damages for breach of contract).4 In their place, a no-retraction regime would substitute a gradual and continuous increase of liability throughout the preconsensual period, culminating in full expectation damages at the point of the contract.

Before beginning an affirmative critique, it seems important to note a threshold ambiguity in the difference between the proposed regime and existing law. Existing law already permits the recovery of reliance damages in circumstances that do not involve a bargain, specifically, where the party that seeks to recover reliance damages can show that it was reasonable to expend money based on the actions of the other party.5 Thus, if a financing partner tells a developer that it should proceed to break ground on a building on the assumption that the parties will be able to work out the details of a financing arrangement, the developer has a good case for reliance damages against the financer, even in the absence of a contract that would permit expectation damages.6

Although the no-retraction regime plainly is different, the extent of the difference is not entirely clear. If Ben-Shahar contends that parties should be liable for expenditures made by potential contract partners only after they make serious proposals, he is saying something not substantially different from current law. Current law would permit such damages if, considering the circumstances, the expending party reasonably could treat the proposal as a license to spend money. That usually happens where one party (based on conduct of the other) justifiably relies on the fact that a contract is forthcoming. Ben-Shahar’s proposal may simply provide a remedy at an earlier stage (before the parties reach a point where it is fair to assume that a contract is forthcoming) and may extend that remedy to all expenditures, regardless of the reasonableness of the expending party’s position.

A central ambiguity in that proposal is how to determine which communications create liability. Ben-Shahar’s model takes as a given that “serious” communications will induce an appropriate measure of reliance and that all other communications will be ignored. That simply assumes away the problem – which occupies much of existing doctrine – of determining what types of promises are sufficiently serious to warrant reliance on the part of the recipient.7

However, that narrower understanding of Ben-Shahar’s proposal is inconsistent with his emphasis on a slow and gradual development of liability based on the gradual juxtaposition of See Restatement (Second) of Contractsunder the current common law).

5

64 See Restatement (Second) of Contracts Yale L.J. 1261, 1305-09 (1980)(discussing several cases where courts used promissory estoppel (last visited Feb. 27, 2004).

This problem is the general topic of Richard Craswell [48 StanLRev piece currently first cited in note 48]. 7

合同的合意

negotiating positions.8 Reliance damages, as typically contemplated, have the same type of all-or-nothing switch that expectation damages under consent-based liability rules do. Thus, a party can recover nothing expended before it is reasonable for that party to rely; however, it can recover everything that is reasonably expended after it is reasonable to rely.9 Ben-Shahar’s proposal, in contrast, seems to contemplate a sort of quasi-expectation liability, in which each party always is liable for the expectation of the other party for those points on which the first party has offered a position. As the comprehensiveness of the position increases, the potential liability increases. As the juxtaposition increases, the real-world likelihood that the proposal would be enforced increases.

That precisely reticulated increase in liability is substantially different from current law. I do not think, however, that it works out in practice quite as simply as Ben-Shahar’s presentation suggests. It is not clear, for example, how he would match a slow increase of agreed issues to a slow increase in monetary liability. It appears that he assumes that a court practicably could enforce a gradual increase through the mechanism of enforcement at any stage of a combination of (a) the then-agreed terms and (b) least-favorable terms on all other subjects. As the ratio of agreed terms to least-favorable terms increased through the course of negotiations, the recoverable amount would increase. Whether such a complicated proposition can be implemented by courts is a threshold question about the proposal.

The principal purpose of my response is to consider the propriety of such a unified framework. My response to such a framework is the standard move one would expect from a scholar of a particularizing tendency like myself: that it fails to pay due regard to the to be bound. The central contribution of Ben-Shahar’s project is its treatment of the period before consent. Because the project focuses on opportunism, he uses a model in which negotiation is a division of the surplus that the contract would create.10 Within that model, any retreat from a negotiating position plausibly is viewed as an opportunistic effort to capture an inappropriate share of the surplus. To enable those negotiating positions to be made more credible, and thus more effective at inducing reliance,11 the proposed regime would impose liability on those who “retract” serious negotiating proposals. That conclusion rests on his analysis (here and in his work with Bebchuk) of the benefits that will arise from enhancing the ability of the promisee to adapt its behavior in response to a credible promise. parties have, the greater the fraction of contract liability the plaintiff can enforce.”).

damages).

10

1198 The model is set out formally in Bebchuk & Ben-Shahar, supra note 2. This form of analysis builds implicitly on the work of Goetz & Scott, supra note Error! Bookmark not defined..