Учебный год 22-23 / Binding Promises - The Late 20th-Century Reformation of Contract Law

of the opposite situation. The California Supreme Court used the covenant of good faith and fair dealing to require a liability insurer to accept a reasonable settlement offer from a liability claimant. An Iowa court on the same facts might have used reasonable expectations; that is, it might have held that absent a clear warning to the contrary, someone who bought liability insurance would reasonably expect that the insurer had a contractual duty to accept a reasonable settlement offer from a liability claimant.

A court should use a relational tort rather than reasonable expectations to create a duty if the duty meets either of two conditions: it serves a public policy, or the typical consumer would lack bargaining power on the subject because he would not understand it. A court should use reasonable expectations to impose the duty in all other cases. The difference is the ability of producers to avoid the duty in the future. The law generally allows one person to contract out of a tort duty he would otherwise owe to another if the duty meets both of two conditions: avoiding it will not violate a public policy, and the parties to the contract have about equal bargaining power on the subject.3 These two concurrent conditions are effectively the opposites of the two alternative conditions I just suggested for determining whether a court should use relational torts or reasonable expectations to create a duty—with one exception. The exception is that whereas the second alternative condition is that the typical consumer would lack bargaining power on the subject, the second concurrent condition is that the parties to the contract have about equal bargaining power on the subject.

Therefore, if a court creates a duty as a relational tort, the law will generally limit producers’ ability to contract out of the duty in the future to situations in which public policy will not be violated and the producers and the particular consumers concerned have about equal bargaining power on the subject. On the other hand, if a court uses reasonable expectations to create the duty, the law will allow producers to contract out of it in the future for all consumers, by changing their contracting practices to change consumers’ reasonable expectations on the subject. Using reasonable expectations preserves freedom of contract in all cases; using relational torts limits freedom of contract to special situations.

Take, for example, the tort duty everyone owes to everyone else not to negligently harm their person or property. The law presumably would allow a construction company to contract out of this duty with respect to the employees and property of a manufacturer in connection with some work the construction company was doing for the manufacturer. The manufacturer would presumably be knowledgeable enough about construction work to understand the risks involved, and the public policy of protecting people from negligently inflicted personal injuries would not be violated,

because the manufacturer presumably would have protected its employees under the workers’ compensation laws. On the other hand, the law presumably would not allow a construction company to contract out of this duty for work it was doing on a private residence. The owners and occupants of the residence presumably would not have the protection of the workers’ compensation laws, nor would they be knowledgeable enough about construction work to understand the risks involved.

The alternative conditions I have suggested for determining whether to create a relational tort rather than use reasonable expectations are also consistent with the reasons courts have given for creating relational torts in the past. The courts that created relational torts generally justified them on the grounds that the relationship was imbued with “a public interest,” “adhesion,” or “fiduciary responsibility.” “Public interest” in this context meant the producer’s activity served a public policy, “adhesion” meant there was unequal bargaining power, and “fiduciary responsibility” only expressed the need for a relational tort, which the presence of the first two attributes already demonstrated, as I explained in Chapter 4.4

Applying the suggested criteria to the facts of C & J and Comunale leads to the conclusion that a court today should use a relational tort rather than reasonable expectations on both of them. The unexpected definition of burglary that the insurer used in C & J satisfies both criteria. The definition was a fraud under the circumstances, and of course, there is a public policy against fraud. The insurer offered burglary insurance that it knew would not cover certain common situations that the consumer would expect burglary insurance to cover. The justification the insurer in C & J offered was that the definition allowed it to avoid liability for “inside jobs.” These included employee embezzlements or attempts by an insured to defraud his insurer by faking a burglary loss. However, the definition does not effectively serve either purpose. An insured who sought to defraud his insurer by faking a burglary loss could also fake the visible marks of illegal entry. And the definition is not necessary for avoiding liability for embezzlements, because an insurer is not liable for embezzlements under a burglary insurance policy. The unexpected definition also satisfies the second part of the test, because consumers generally would not be capable of accurately estimating the actuarial risks involved in such a definition even if the insurer tried to explain them.

The facts of Comunale also satisfy both criteria. Liability insurance serves at least two public purposes, and the duty the court imposed serves at least one of them. Liability insurance provides insureds with protection against potentially ruinous financial loss, and it provides accident victims with financial resources to pay their medical expenses and to compensate them for their lost earnings and earning capacities. At least its ability to

serve the second purpose is undermined if insurers do not pay the victims’ reasonable settlement offers. One could not reasonably expect to educate the typical consumer well enough in the settling of liability insurance claims to enable him to decide intelligently for himself whether to accept a contract of insurance in which the insurer had waived its duty to accept a reasonable settlement offer.

Farm Bureau Mutual Insurance Co. v. Sandbulte,5 on the other hand, is an example of a case in which a court ought still to use reasonable expectations. The insured claimed that his “farm premises only” motor vehicle liability policy covered an accident to one of his trucks that occurred during an 8-mile trip on a public highway from one part of his farm to another. The Iowa Supreme Court affirmed the trial court’s denial of the claim on the ground that this was not reasonable to expect. One can easily imagine farmers who might be willing to pay higher premiums to have insurance that covered such extended trips off the farm premises. If there are such farmers, presumably there are also insurers who would like to sell this kind of insurance to them. There are no evident public policy considerations opposed to such insurance, and the subject is not too difficult for the general consumer to understand.

Reasonable Expectations under the Uniform

Commerical Code

Reasonable expectations is a means of determining the contents of a contract. The Uniform Commercial Code, therefore, does not prohibit using reasonable expectations unless it would determine the contents of the contract differently. Sections 2-207 and 2-316 are the only sections that might do this. Section 2-316 sets forth certain requirements that a seller must meet in order to disclaim warranties. The section would determine the contents of the contract differently from what a buyer would reasonably expect in some situations if we interpreted these requirements as both necessary and sufficient. A seller who met them would then have succeeded in disclaiming the relevant warranties even if the buyer did not reasonably expect it. The obvious way to avoid this result is to interpret the requirements as necessary but not sufficient. A seller must meet the requirements and arrange the transaction so that the buyer reasonably expects the disclaimers in order that the warranties be disclaimed. Interpreting the section this way should not present a problem, because its principal purpose is to protect buyers.

Section 2-207, the offer and acceptance section, presents a major obstacle if one interprets it literally. It operates arbitrarily; the elaborate scheme it sets out for determining the content of the contract will produce the con-

tract the parties reasonably expected only by accident. However, as I explained in Chapter 6, the line of decisions led by Daitom, Inc. v. Pennwalt Corp.6 effectively reconstructs the section to make it consistent with reasonable expectations. Therefore, there is no obstacle to using reasonable expectations under the Code if a court follows Daitom in interpreting Section 2-207.

Relational Torts under the Uniform Commerical Code

The Code is a statute, and relational torts are common laws. The Code therefore prevails over any relational tort with which it conflicts, and if a court determines that the Code governs a situation, it is constitutionally prohibited from creating a relational tort with which the Code would conflict. The question of whether a court can legitimately create a relational tort for contracts governed by the Code therefore reduces to the question of whether the relational tort and the Code would conflict with one another. Section 1-103 expresses the policy that a court is not to find such a conflict lightly. The section reads:

§ 1–103. Supplementary General Principles of Law Applicable.

Unless displaced by the particular provisions of this Act, the principles of law and equity, including the law merchant and the law relative to capacity to contract, principal and agent, estoppel, fraud, misrepresentation, duress, coercion, mistake, bankruptcy, or other validating or invalidating cause shall supplement its provisions.

The only laws to which this section refers are other laws of contract or laws that explicitly validate or invalidate contracts. The law of principal and agent validates or invalidates contracts that one person makes in the name of another. Bankruptcy laws validate or invalidate the contracts of a bankrupt. The other laws mentioned are parts of the law of contract (although they may also operate elsewhere, as does estoppel, for example). In particular, there is no reference to the law of torts, either generally or to particular parts of it.

The drafters must have limited their references in this manner because they assumed that no other kind of law could conflict with the law of contract. This assumption is correct in any event. The only other kind of “conflict” is the one that went under the name of freedom of contract back at the turn of the century: a law “conflicts” with contract law if it provides a right or duty about which people could otherwise have contracted. For example, the U.S. Supreme Court held in Lochner v. New York that a New York state statute limiting the hours bakery employees could work to ten hours a day and sixty hours a week was unconstitutional because it “interfer[ed] . . .

with the right of contract between the employer and employees, concerning the number of hours in which the latter may labor in the bakery of the employer.”7 The absence of any references in Section 1–103 to regulatory laws such as this, to tort laws, or to other laws that provide rights and duties about which people could otherwise have contracted makes clear that the Code drafters did not intend to revive the old law of freedom of contract. We should consider the old law of freedom of contract as being as dead for the Code as it is for the common law of contract.

The courts’ treatment of products liability law makes a good illustration of this proposition. Products liability is tort law. It applies to manufactured products, which are “goods” as the Code defines them. Code Sections 2- 314 and 2-315 impose essentially the same duties on sellers as the law of products liability imposes on them, but whereas the Code permits sellers to disclaim these duties and to limit the remedies buyers have for the seller’s breach of them, products liability law generally prohibits such disclaimers or remedies limitations. Products liability law thus “conflicts” with the Code in the sense that the old law of freedom of contract conceived of such conflicts. Nevertheless, every state has both the Code and products liability law, and in no state have the courts held that the Code allows sellers to limit or disclaim the liabilities they would otherwise have under the law of products liability.

However, the Texas Supreme Court came to a different conclusion for relational torts in Cate v. Dover Corp.8 in 1990. The court had held in

Melody Home Manufacturing Co. v. Barnes9 in 1987 that services sold to consumers carry an undisclaimable warranty of “good and workmanlike manner,” but it decided not to extend the warranty to manufactured products in Cate because the Code precluded it. In Cate, the relational tort would conflict with the Code provisions permitting sellers to disclaim warranties. Although it did not do so, the court could have stated its reason in essentially the same words that the U.S. Supreme Court used in Lochner— that, the relational tort would “interfere with the right of contract between seller and buyer, concerning the warranties that shall accompany the sale of goods by the former to the latter.” Cate effectively revived Lochner for Code contracts. The decision was unfortunate because it created an unprincipled distinction. The reasons that led the Texas Supreme Court to conclude that sales of services to consumers should carry undisclaimable warranties apply equally to sales of goods to consumers.

The court made matters more difficult for itself in Melody Home, when it called the duty to render services of good and workmanlike quality an “implied warranty.” “Warranty” is the language of contract, not tort. A seller “warrants” something when he expressly or impliedly represents that it is the case. The law cannot imply a warranty except by analogy to the

contract law meaning of the word. By using the analogy for services, the court made it seem that it would be making law in conflict with the Code if it extended the law to goods. Courts made the same mistake decades ago in the course of developing the law of products liability. Many of them initially called it, too, an “implied warranty.”10 It would be less confusing if we restricted “warranty” to the law of contract and called torts “torts.”

The other possible conflict between a relational tort and the Code concerns the duty of a person who sells his expert advice to provide it competently and with due care. If we characterize the person’s occupation as a profession, we generally call a violation of the duty malpractice, but whether or not we thus characterize the occupation, the duty, if the law imposes it, sounds in tort. The possible conflict is with Section 2-316 of the Code, which allows a seller to disclaim any or all of the warranties that other sections impose if the seller meets the requirements that Section 2- 316 imposes for disclaimers. The pertinent warranties in this case are those of “fitness for particular purpose,” which Section 2-315 imposes.

If, in addition to selling goods, a seller offers expert advice on which goods or kinds of goods will best serve the buyer’s particular purposes, Section 2-315 provides, in effect, that he warrants that the advice is correct. However, Section 2-316 allows a seller to disclaim this warranty. On the other hand, if the common law imposes a duty on a person engaged in the occupation concerned, sounding in tort, to provide advice competently and with due care, the law does not allow him to disclaim the duty. Lawyers and physicians cannot disclaim their professional responsibilities, for example. If we allow Section 2-316 to override tort law in this instance, we create an arbitrary distinction. Those who give expert advice and sell the goods to which their advice relates can disclaim their liabilities for giving bad advice, whereas those who give the advice but do not sell the goods cannot disclaim their liabilities. As I noted in Chapter 6, this line of reasoning leads to the conclusion that physicians can contract out of their professional responsibilities if they sell their medicines.

We ought not to make this distinction, and if we take the correct view of when the Code conflicts with the common law, Section 2-316 does not require us to make it. We should never regard the Code as conflicting with the law of tort, because the Code presupposes that the rights and duties with which it deals are contractual. Therefore, if the law of tort imposes a duty on those who give a certain kind of advice to provide it competently and with due care, the fact that they also sell the goods to which their advice relates should not allow them to disclaim the duty. In sum, we should not consider the contract law of the Code to preclude courts from creating relational torts any more than we consider the common law of contract to preclude them.

Bad Faith Breach under the Uniform Commerical Code

The conclusions just reached for relational torts also apply to bad faith breach, because bad faith breach is also a tort. One could use the same faulty reasoning that led the Texas Supreme Court to refuse to create a relational tort for contracts governed by the Code to refuse to apply bad faith breach to contracts governed by the Code. Bad faith breach “conflicts” with the Code by providing kinds of damages that the Code does not.

In this case, however, the Code has not stood in the way. Courts have used bad faith breach without even noting whether the Code governed the contract. For example, the decision in which the California Supreme Court first spelled out the elements of bad faith breach, Seaman’s Direct Buying Service, Inc. v. Standard Oil Co.,11 involved a contract for the sale of boat fuel. The decision in which the Indiana Supreme Court first set forth the circumstances under which breaches of contract could carry punitive damages liability, Hibschman Pontiac, Inc. v. Batchelor,12 involved a contract for the sale of an automobile. The Code governed the contract in both cases, because both boat fuel and automobiles are “goods.”

The Choice between Legislation and Judicial

Lawmaking for Article 2

Article 2 stands in the way of some of the reforms. Section 2-207 stands in the way of a court’s using reasonable expectations in the “battle of the forms,” and the sections on warranties, warranty disclaimers, and remedies limitations stand in the way of a court’s creating certain kinds of relational torts. Although I showed in Chapter 6 how the Daitom line of decisions overcomes the first obstacle, and I explained above how a court could overcome the second obstacle, of course there is no assurance that other courts will follow Daitom or that any courts will accept my explanation. Article 2 is also a problem because it provides a contract law that differs from the common law of contract in numerous respects for which there are no apparent justifications. Moreover, the contract law of Article 2 is generally inferior to the common law insofar as it differs from it, or at least this must be the view of the courts, which have not adopted a single provision of the article into the common law despite the Code’s Official Comments inviting them to do so.13

The solution I propose is to amend the article to give the courts the authority to treat it as though it were common law. Llewellyn proposed this originally, although his proposal and mine differ slightly. Such an amendment would provide the following benefits.

More Current Laws

Amending Article 2 is difficult because amending it would destroy its interstate uniformity unless every state legislature enacted the same amendment, and the article’s interstate uniformity is its principal value. The article has never been importantly amended, although its drafting was complete by 1960 and a majority of state legislatures had enacted it by 1970. The only important amendment even officially proposed has been one to amend Section 2-207, the “battle of the forms” section, which I mentioned in Chapter 6, and the Commissioners on Uniform State Laws have not yet decided whether to propose it, although the Permanent Editorial Board for the Uniform Commercial Code did so in 1990. Moreover, Article 2 needs comprehensive reform. Piecemeal reform like that being considered for Section 2-207 will never be sufficient. No one has even begun to discuss comprehensive reform, although the need for it has long been apparent.

On the other hand, the courts’ achievements over the same period have been monumental. They have produced the four major reforms of contract law since about 1960. They have broadly interpreted Article 2 in an effort to make it good law; but for these efforts, the article would need amending even more urgently. Although the pace of some of the reforms has been slower since the middle 1980s, we can attribute most of the slowing to the reforms’ having been largely accomplished. Moreover, the slowing has only been relative to the extraordinarily fast pace of reform that prevailed in the 1960s and 1970s. It is inconceivable that the American judiciary will revert to the rigid formalism of the late nineteenth and early twentieth century that Llewellyn so disparaged. That was based upon a mystical belief in the common law that is quite foreign to the modern temperament. I doubt whether even the most conservative judge today thinks of the common law as a “brooding omnipresence in the sky,” as Oliver Wendell Holmes, Jr., accused judges early in this century of thinking of it.14

This contrast is reason enough to adopt my proposal. We cannot hope to keep Article 2 current by amendment in the usual sense. On the other hand, we have good reason to believe that the courts will quickly bring it up to date and keep it current if we give them the authority to do so. Moreover, enacting the amendment would be a risk-free experiment. The legislatures could take back the authority the amendment granted any time they wanted to, and they could always change any laws the courts had made with the authority the amendment had granted them. Enacting the amendment would not even prejudice anyone who believed that legislation is superior to judicial lawmaking for contract law. Such people

could continue their efforts at drafting amendments, and the legal community could choose between the results of their efforts and what the courts had achieved in the interim when they offered their proposed amendments for enactment.

More Uniform Laws

Llewellyn achieved his goal of a sales law uniform across the states, but all he did for contract law was to create more differences. The courts have not adopted any of the contract law of Article 2 into the common law, and the contract laws of Article 2 and of the common law differ in numerous places. There are just three ways we could eliminate these differences. We could extend Article 2 to the whole law of contract, thereby eliminating the common law of contract entirely; we could amend the article to conform it to the common law; or we could adopt the proposal I have offered, which would authorize the courts to eliminate any of the differences they concluded were unjustified. The first possibility is not worth considering in view of the sorry record of Article 2; it would be a disaster to make the article the law for all contract cases. We should also reject the second possibility. No matter what the amendment was, it would not match the common law of contract in any state, because each state has its own common law of contract, and although the differences among them are rarely important, they are still differences. More important, amending away differences would only be a temporary solution, because the differences would reappear as soon as the courts changed the common law or recognized new distinctions or refinements in it. Adopting the proposal would therefore be the best way of achieving uniformity.

There are also reasons for concluding that judicial lawmaking is superior to legislation for achieving uniformity over the long term even if uniform legislation is superior for achieving it initially. A comparison of James J. White and Robert S. Summers’s treatise on Article 2 and E. Allen Farnsworth’s treatise on the common law of contract, which contain about the same numbers of pages, gives one the clear impression that there is much more disagreement about Article 2 than about the common law of contract. This is the case despite two facts that would lead one to expect the contrary. The common law of contract covers much more law than the article does, and disagreements about the articles have had only about twenty-five years to accumulate, whereas the modern common law of contract has existed for about a century.

The uniformity that legislation seems to promise is illusory because courts must interpret it. Judicial interpretation of Article 2 is especially destructive of uniformity because there is no highest court with the author-

ity to resolve conflicting interpretations. The Constitution of the United States requires the federal courts to follow the decisions of the courts of the states in which the federal courts sit,15 and the courts of each state are independent of the courts of every other. All this is true for state common law as well as for state legislation, but judicial interpretations of legislation tend to produce more diversity in the absence of a highest court to resolve their differences than does the making of common law, because courts are not free to base their decisions on principles when they interpret legislation. They are always constrained to at least some extent by the language of the legislation. The principles of the common law of contract are relatively few and well established, whereas the language of Article 2, like the language of any statute, is capable of almost infinitely various interpretation. Interpreting Article 2 is especially difficult, because for most of it, there is neither any meaningful legislative history nor any other reliable source of information about the drafters’ intentions, as I explained in Chapter 6.

Better Laws

The reasons why legislatures rather than courts should make certain laws do not apply to contract law, and the reasons why courts rather than legislatures should make certain laws do apply to contract law. We have to use legislation rather than judicial lawmaking if we want to create or modify a government institution (a police force or a social security system, for example) or to raise or spend money, but contract law has no such requirements. We may also want to use legislation rather than judicial lawmaking if the law poses important questions that ought to be answered by the processes of democratic governance, but contract law does not pose such questions. The enactment of the Code demonstrated this. Legislators were only formally involved in enacting it, and they would be only formally involved in enacting any amendments to it for the same reasons. It does not present politically significant issues, and understanding it requires more specialized knowledge than any sensible legislator would consider worth the effort of acquiring. Like any of the major parts of the common law, the primary purpose of contract and sales law is to resolve disputes, in this case, disputes between parties to contracts or sales. Any such law should be a judge-made law, because the judges who resolve the disputes are in the best position to make the law that will resolve them fairly and efficiently. They are the experts, they have the benefit of hearing adversary argument, they are less subject to political pressures than legislators, and they can do it without delay, as soon as the cases presenting the need for change reach them for decision.