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

In fact, the laws of sales and contracts are so far outside the normal concerns of legislators that we can safely predict that legislators would not really fashion the legislation that amended Article 2 even if we were to amend it. Scholars would draft the amendments, just as they drafted the article initially. Therefore, the only real choice we have is between judicial lawmaking and scholarly lawmaking, and this choice is easy. Our institutions for judicial lawmaking are greatly superior to our institutions for lawmaking by scholars. Lawmaking by scholars generally begins with the American Association of Law Schools, the American Law Institute, or the Conference of Commissioners on Uniform State Laws. One or more of these organizations sponsors a committee, the committee proposes an amendment, the organizations approve it or send it back for reconsideration, and eventually the organizations offer the final product to state legislatures for enactment.

Scholars characteristically have the advantages over judges of leisure and expertise. They are not pressed by heavy caseloads to make their decisions quickly. The organizations that choose the scholars to sit on drafting committees choose them for their demonstrated expertise in the kind of legislation the committee will draft. All these are important advantages, but we would not lose them if we chose to allow judges to make the law of Article 2. Indeed, we would enhance them. Scholars could continue to make their arguments and proposals in articles and books. This method would be superior to having a few scholars compose a drafting committee for several reasons. First, the number of scholars who can write articles or books on a subject is unlimited. Second, there is no need to prejudge a scholar’s qualifications in order to choose a committee, so judges and other scholars could evaluate every scholar’s contribution on its merits. We would avoid the inevitable politicking for a place on a committee, along with its distorting effects on the results. Third, there is no need to mute or distort anyone’s arguments in order to compose a majority; everyone is free to express his or her arguments in their full force and effect.

Although one could characterize appellate courts as committees in the sense that at least three judges sit on them, they are less likely than drafting committees to possess the bad attributes of committees, because our judicial systems have evolved means of avoiding these attributes. We do not appoint people for appellate judgeships on the basis of their demonstrated expertise on a particular subject, so a person who seeks an appellate appointment does not need to politick on such a basis. Judges, as a result, are generally not biased on a subject before they make a decision on it. Whereas the members of a drafting committee must reconcile their views on the law if they are to compose a majority, the judges who compose a majority on a result are generally not committed beforehand on the law that would enable them to reach it. (I am not ignoring the obvious fact that those

who appoint judges often pay close attention to the prospective appointees’ opinions on some public issues, but what I said still remains true as a rule. Judges typically decide thousands of cases on an extremely wide variety of subjects in the course of their careers. Those who appoint them cannot possibly select them for their biases on more than a very small portion of these decisions.)

Additionally, judges are not experts with academic reputations to promote and thus have less personal stake in having their own views prevail. The lawyers for the contending parties educate the judges on the case in appellate argument. They do their best to point out the strengths of their own position and the weaknesses of their opponents’. Not only is there no assurance of any such argument on a drafting committee, the selection of the committee members is almost sure to have been motivated by a desire to avoid it. Committees reach their decisions by majority vote. One could not expect a drafting committee to reach a sensible conclusion if one appointed people with diametrically opposed views to sit on it; in fact, drafting committees are generally composed of people whose agreements on the subject greatly outweigh their differences. But above all, judges must decide the cases before them. The laws they make must take into account every relevant fact, no matter how inconvenient. They cannot make a law entirely from theory and compose little stories about “A” and “B” to justify it, as the drafters of our restatements of the law are so fond of doing.

Finally, common law is superior to legislation drafted by scholars, because scholars can influence it retroactively. Although only judges can make common law in principle, in practice, scholars exert a major influence by how they treat the decisions after the judges have made them. Scholars write about some decisions and ignore others. They characterize decisions as well or poorly reasoned. Above all, they influence the law the decisions embody by the way they express it. The fact that the common law in the United States is actually the common law of each of the fifty-one jurisdictions greatly increases this last source of scholarly influence. Scholars unavoidably have to generalize when they express “the” law on a subject. The generalizing increases the amount of discretion they have in how they express it, because any expression they choose will give more weight to some decisions than to others. Treatise writers have the most influence, because almost everyone begins his or her research with a treatise and, unless the writer is a scholar, also ends it there, or with one or two decisions from the jurisdiction in which he or she is interested. But the scholars who only write articles also have an influence, because the treatise writers read their articles, and occasionally a practicing lawyer engaged in litigation will also read them.

If committees of scholars make inferior lawmakers, we should expect to see some evidence of the fact in Article 2, because scholars working on or

for committees were the chief drafters of it. There is ample such evidence. I have already noted some, which is the virtually unanimous failure of the courts to adopt the contract law of Article 2 into the common law where the two laws differ. This failure is especially persuasive for having occurred during the most creative period the American common law has gone through since the early nineteenth century. The courts could not have failed to adopt the law of Article 2 because they chose not to change the common law at all; they could only have failed to adopt it because they believed it to be inferior.

I have also already noted an example of the article’s inferior law, namely, Section 2-207, the provisions for contract formation in a “battle of the forms.” I will give just one more example, although if space permitted I could give dozens, because Section 2-207 is not typical. It was an attempt to do something almost wholly new at the time, which one might think should excuse its many failures. A more telling example is Section 2-202, the Code’s parol evidence rule. The common law of contract has included the parol evidence rule for more than a century. The drafters of Section 2-202 have only themselves to blame if their product is worse than the common law version. The section reads:

§ 2-202. Final Written Expression: Parol or Extrinsic Evidence.

Terms with respect to which the confirmatory memoranda of the parties agree or which are otherwise set forth in a writing intended by the parties as a final expression of their agreement with respect to such terms as are included therein may not be contradicted by evidence of any prior agreement or of a contemporaneous oral agreement but may be explained or supplemented

(a)by course of dealing or usage of trade (Section 1–205) or by course of performance (Section 2-208); and

(b)by evidence of consistent additional terms unless the court finds the writing to have been intended also as a complete and exclusive statement of the terms of the agreement.

Of course there is no canonical text of the common law parol evidence rule, but the following captures its essence:

Evidence of the parties’ prior or contemporaneous oral agreements or their prior written agreements is not admissible to add to or vary the terms of the written contract if it is an integration. An integration is a contract the parties intended to be the final and complete expression of their agreement on the subject.

The confusions in Section 2-202 begin with its title. The parol evidence rule has nothing to do with extrinsic evidence unless it is evidence of the parties’ prior or contemporaneous agreements. There are numerous other rules for determining whether other kinds of extrinsic evidence are admissible. The section’s reference to course of performance is especially con-

fusing. “Course of performance” evidence of a contract’s meaning is that which one can infer from the parties’ performance of the contract; therefore, it can never consist of agreements they made prior to or contemporaneously with making the contract and thus has nothing to do with the parol evidence rule. Moreover, the references to course of dealing, usage of trade, and course of performance make it seem that these are the only kinds of extrinsic evidence that are admissible to “explain or supplement” a written agreement, but if courts were to give the section this effect, they would often reach incorrect conclusions. There are many other kinds of extrinsic evidence one can legitimately take into account for the purpose of interpreting a written contract.

Even more confusing is the section’s splitting of the concept of an integration into two parts and giving the parts different consequences. The common law defines an integration as the parties’ final and complete expression of their agreement, whereas Section 2-202 makes the operation of the rule depend solely on the parties’ intending the written contract to be their final expression of agreement. Then, in Subsection (b), it prohibits evidence of consistent additional terms if and only if the parties also intended the written contract to be the “complete and exclusive” expression of their agreement.16 Nothing in the Official Comments or elsewhere so much as hints at why the drafters split the integration concept in this fashion. One result is to broaden the application of the rule practically without limit. The rule of Subsection (a) applies to any written agreement or confirmatory memorandum, however partial, that the parties intended to be final, and because people ordinarily intend almost any agreement they make to be final until they agree differently, the result is that as a practical matter, the rule applies to any written agreement or confirmatory memorandum.

The splitting also makes the Code rule much stricter than the common law rule. If the parties intended the written agreement to be both complete and final, Subsection (b) prohibits evidence of additional terms even if they are consistent with the writing, whereas the common law still allows such evidence under a variety of exceptions, principally under the so-called collateral agreement exception. Finally, the section is confusing on the distinction it intends between supplementing a written agreement and adding to it. “To supplement” means to add to.

If the drafters of Article 2 had intended any of these differences, they presumably would have given us their reasons for them, but the Official Comments to the section do not mention any of them. We can only conclude that the differences were unintended, which is to say, they are misunderstandings of the common law parol evidence rule or mistakes of drafting. The only change that the Official Comments say was intended is that a judge is to keep the jury from hearing the evidence of the additional terms to which Subsection (b) refers only if he or she concludes that the parties,

if they had agreed upon them, would certainly have included them in the writing. This is a change from the common law, because the common law does not impose so strict a standard for excluding such evidence. Yet, the section itself includes nothing on what the comment says this standard should be. All in all, the section reads as though Llewellyn assigned the job of drafting it to people who did not understand the parol evidence rule and only discovered how bad a job they had done after it was too late to change it, so he then tried to salvage at least the one change he intended by including it in the Official Comments.

An Amendment to Authorize Judicial Lawmaking

Although the bulk of the contract law of the Code is in Article 2, some of it is in Article 1, so we need to amend both articles. We should amend them to provide that, with certain exceptions,17 a court should henceforth treat them as though they consisted of the decisions of the courts of other jurisdictions. This would make these articles not authoritatively binding on a court except to the extent that the courts of the jurisdiction concerned had interpreted or changed it, in which case those courts’ decisions would have the same authority they would have in any other situation. The amendment ought not to provide that the articles shall have the same authority they would have for a court if they consisted of the decisions of the highest court of the state of the court deciding the case. This would make the article more binding on lower state courts than it now is, and it would constitutionally prohibit the federal courts from making any changes in the article whatever. A lower state court must follow the decisions of its state’s highest court, and the U.S. Constitution requires a federal court to follow the decisions of the highest court of the state in which the federal court sits, on questions of state law.18

Such an amendment would not only free the courts to eliminate the many arbitrary differences between the common law and Articles 1 and 2 and to bring the articles up to date and keep them current, it would also have a freeing effect on legal scholarship. Scholars could concentrate their thinking on what they considered to be better law, without having to try to square their proposals with the articles’ provisions. The amendment would not render previous scholarship obsolete. The authors of the current treatises on Articles 1 and 2 would not need to change a word except to replace their references to the constraints certain provisions impose with recommendations that the courts not follow the provisions. There is no doubt in my mind that Llewellyn would support such an amendment if he were still with us. Enacting it would be a tribute both to him and to the many men and women who became the grand-style judges he hoped they would be.

The only other person to my knowledge who has addressed the question of whether judicial lawmaking would be preferable to amending Article 2 is David A. Rice; he reached conclusions similar to mine in an article he published in 1992.19

Constitutional Considerations

Legal actions between private persons rarely raise constitutional issues because there is rarely any “state action” if a government is not a party. However, if a claim or defense rests on a law that is unconstitutional or that operates unconstitutionally under the circumstances, the law itself provides the state action. The U.S. Supreme Court has recognized that contract actions can present due process issues on this basis in two lines of decisions.

Standards for Punitive Damages

The more recent line consists of six decisions handed down from 1986 to 1994 on the constitutionality of punitive damage awards under the Eighth Amendment’s excessive fines clause and the substantive and procedural due process clauses of the Fourteenth Amendment.20 The penultimate decision in the line, TXO Products Corp. v. Alliance Resources Corp.,21 failed to produce a majority opinion on the subject. Justice Stevens wrote the opinion for the Court, acknowledging that punitive damages violate substantive due process if they are “grossly excessive.” However, it was irrelevant that they were 526 times the compensatory damages in the case. The relevant comparison was to the badness and potential profitability of the “scheme” or “larger pattern” of conduct out of which the wrongful conduct arose. All the Justices except Scalia and Thomas agreed with the “grossly excessive” standard, but only the Chief Justice, Justice Blackmun, and Justice Stevens agreed that the comparison with the compensatory damages was irrelevant. Justice O’Connor claimed it was relevant in her dissent, which Justices Souter and White joined. Justice Kennedy did not address this issue, but argued that the important thing was the reasons the jury had for reaching the result rather than the result itself. Justices Scalia and Thomas argued that there is no federal substantive due process right against excessive punitive damages.

Justice Stevens’s opinion for the Court is consistent with the conclusions I reached in Chapter 6. I concluded that the basic measure of the punitive damages should be the profitability of the company policy out of which the defendant’s wrongful conduct arose and that the traditional requirement that punitive damages not be disproportionate to the compensatory dam-

ages was incorrect. Compensatory damages and punitive damages serve different purposes; there is no reason why they should be similar in amount. If the comparison is to be made at all, lower compensatory damages should justify higher punitive damages and vice versa, because the lower the compensatory damages, the higher the punitive damages must be in order to punish the defendant by a given amount.

The U.S. Supreme Court never overturned a state court punitive damages award until its last decision, and all it then held was that the state law was unconstitutional because it barred any review of the amount of punitive damages a jury awarded.22 The Court’s apparent reluctance to try to articulate standards itself is understandable. The vast majority of decisions imposing punitive damages are state court decisions because the cases arise under state law. A federal court other than the Supreme Court can obtain jurisdiction over a case that does not arise under federal law only if there is diversity of citizenship and the out-of-state defendant removes the case to the federal system. The defendant in such a case can seldom do this, because the defendants in these cases are usually corporations, and federal law defines diversity of citizenship for corporations very narrowly.23 The only court in the federal system that can review a punitive damages decision of a state court is the Supreme Court, which can review decisions of a state’s highest court if they present federal questions.24 However, there is no sign yet that the Court’s decisions have persuaded a state supreme court to rethink the subject.25 Perhaps a bold federal district court judge could begin the process by invalidating as unconstitutional some parts of the state law that she or he would otherwise have to follow in a removal case.26

Limitations on the American Rule

The second line of decisions goes back to 1970. The Court held in these cases that the “property” the due process clause protects is anything the state concerned recognizes as a legal right. A contract right is property under this definition, and some of these decisions involved contract rights. This line of decisions involves procedural due process, but there is no reason to think that the definition of “property” the Court has offered will not also apply for substantive due process.27

A 1985 decision, Walters v. National Association of Radiation Survivors,28 is especially pertinent. A federal statute enacted in the nineteenth century prohibits a lawyer from accepting more than $10 for his services in contesting a claim against the Veterans Administration. The Court upheld the statute on the ground that even though it effectively deprived veterans of the services of lawyers in prosecuting claims against the Veterans Administration, the agency’s procedures were still constitutionally sufficient

because they worked effectively without lawyers. The Court also accepted the agency’s claim that the presence of lawyers would make the procedures more expensive and less effective for most veterans.

Walters rests on two assumptions. First, lawyers are necessary to make procedures constitutionally sufficient if the laypersons who use the procedures need lawyers in order to use the procedures effectively. Second, a system deprives people of lawyers if it prevents paying reasonable remuneration to them. The decision therefore makes the American Rule unconstitutional under certain circumstances. People with small contract claims can bring them in small claims courts, which work effectively without lawyers. People with large contract claims generally can afford to pay lawyers reasonable remuneration despite the fact that they cannot recover their payments from the defendants if they win. However, the American Rule deprives people with middle-level contract claims of any effective way of collecting them, because their claims are too large for small claims courts but not large enough to permit them to pay lawyers reasonable remuneration. The U.S. Court of Appeals for the Ninth Circuit interpreted Walters as giving rise to the same two implicit assumptions upon which this argument is based, although the decision did not involve the American Rule.29

Walters logically would also invalidate the American Rule for the defendant if it would invalidate it for the plaintiff. That is, the defendant, if he won, would be entitled to reimbursement of his litigation costs from the plaintiff if Walters would operate to entitle the plaintiff, if he won, to reimbursement of his litigation costs from the defendant in the same case. Two reasons lead to this conclusion. First, if the amount at stake is not large enough to warrant the plaintiff’s hiring a lawyer, it presumably is also not large enough to warrant the defendant’s hiring a lawyer. Second, settlement negotiations are biased in favor of the party who is entitled to reimbursement of his litigation costs if he wins if the other party is not so entitled, as I explained in Chapter 5.

There would be no need for a constitutional ground for limiting or abolishing the American Rule if the rule were entirely common law, but it is not. There are statutes incorporating it for special situations in virtually every state. For example, Section 10111 of the California Insurance Code provides that “in life or disability insurance, the only measure of liability and damage is the sum or sums payable in the manner and at the times provided by the policy.” Enacted in 1935, Section 10111 barred recoveries of litigation costs in life and disability insurance cases until the California Supreme Court used its previous holdings that the covenant of good faith and fair dealing sounds in tort to avoid the section’s operation in 1985. Statutes like Section 10111 should be unconstitutional under Walters insofar as they operate to prohibit winning plaintiffs from recovering their litigation costs for middle-level contract claims.

Moreover, Walters should be an important influence even if no statutory prohibition exists. The American Rule has existed in practice for two centuries. Although courts did not issue explicit rulings on the point until late in the nineteenth century, the inability of lawyers to obtain adequate compensation from the costs the courts imposed on the parties had required clients to resort to giving their lawyers “gifts” in order to get good representation since colonial times. Judges who would otherwise be reluctant to change a rule so well established should now realize that they have no choice.

Preventing Abuses

Many people believe that the reforms have allowed consumers to bring too many actions and to recover overly high damages. There is no doubt that consumers are bringing more actions and recovering more damages than they were thirty years ago, but of course it does not follow that they ought not to be. However, there are some respects in which the new rights have undoubtedly led to abuses. The question is not whether this is true, but why it happened. In many cases, analysis shows that the fault is not with the reforms but with something else in the situation.

I treated two sources of abuse of the tort of bad faith breach in Chapter 5: the vagueness in the tort’s definition that still exists in some jurisdictions, and the practice of allowing the jury to decide whether the defendant’s conduct had a reasonable basis in law, which exists in almost every jurisdiction. A similar practice is an important source of abuse in suits resting on relational torts, especially in the insurance area. Many of the duties that the new laws place upon insurers require the insurer to make a legal judgment. For example, the duty to accept a reasonable settlement offer from a liability claimant requires the insurer to make legal judgments about how persuasive the claimant’s evidence would be with the jury and how persuasive the claimant’s legal arguments would be with the judge. Yet the practice virtually everywhere is to allow the jury to decide whether the insurer made these judgments correctly. Typically, each party brings in a lawyer who is expert in the area to testify on the issue, and the jury chooses which lawyer to believe. Surely, judges rather than juries should be making these decisions. They are questions of law and of the practice of law, which judges could decide much more competently.

Another source of abuse in the insurance area is the measure of damages for an insurer’s failure to accept a reasonable settlement offer. The measure is the amount of the so-called excess judgment, which is the amount by which the judgment against the insured exceeds the amount the insurance covers. This measure is logical if the insured has sufficient assets to pay the

excess judgment, but the practice is to use it even if the insured does not have sufficient assets. Because insureds typically assign their rights against the insurer to liability claimants in exchange for the latter’s promising not to levy excess judgments against them,30 the result is to allow liability claimants to recover more from the insurer alone than they could have from the insured and the insurer together if the insurer had accepted the settlement offer. The difference can be substantial. I consulted on a case in which the insurance coverage was $15,000 and the insurer ended by owing the liability claimant over $7 million. The prospect of hitting such a jackpot leads lawyers to try almost anything to induce the insurer not to accept settlement offers, and the prospect of having to pay such a jackpot leads insurers to try to settle any case that carries the potential of a large excess judgment regardless of its factual or legal merits. The remedy is obvious. The courts should work out a measure of damages that takes account of an insured’s inability to pay the excess judgment.

There are also abuses in the employment area. Employers have had difficulty in discharging employees who have not performed their jobs adequately, without being liable for lost compensation and in many cases for emotional distress damages in addition. The fault here is with the civil service laws and private employment contracts, most of which derive from nineteenth-century conceptions of employment that are no longer accurate. Most manual or clerical work in the nineteenth century was simple and repetitious. This fact enabled us to measure a person’s job performance by objective factors: so many bricks well laid per hour or so many words accurately typed per minute, for example. Civil service laws and private employment contracts were drafted accordingly. They guaranteed the employee the job indefinitely unless the employer could prove he or she had fallen short of the objective norms that existed for his or her kind of work. Almost all civil service laws and many private employment contracts also guaranteed the employee hearings before impartial boards in which the employer had to prove the employee’s shortcomings before it could discharge him.

Of course many simple and repetitious jobs still exist, but they no longer constitute a majority, and they are not typically covered by civil service laws or the kinds of employment contracts that are patterned on them. For example, although most of the jobs in fast food restaurants are simple and repetitious, the men and women who have these jobs typically have no contractual guarantees of employment; their employers can fire them at will. On the other hand, the jobs that are now covered by civil service laws or good private employment contracts are generally not simple and repetitious, and a person’s performance of one of them cannot be adequately judged by objective factors. For example, my university employs people whose jobs require that they work frequently or primarily with alumni,