Exit, Voice, and Boilerplate

By F. E. GUERRA-PUJOL

Review of The Dignity of Commerce: Markets and the Moral Foundations of Contract Law, by Nathan Oman

Chicago: University of Chicago Press, 2017

Nate Oman begins his new book on contract theory with one of the most famous (imaginary) contracts of all time—the pound-of-flesh pact in Shakespeare’s Merchant of Venice. In abstract legal terminology, S agrees to loan a large sum of money (3000 ducats) to B on the condition that A agree to guarantee repayment the loan. But what makes this simple agreement so memorable is its quasi-Faustian penalty clause. If the loan is not repaid in full by a certain date, S may elect to obtain a pound of A’s flesh! Oman poses the central question of contract law: why shouldn’t the law enforce this bargain? After all, the parties voluntarily and knowingly consented to these terms, however monstrous. (Or, to paraphrase Prince Hamlet: to enforce or not to enforce, that is the question …)

For his part, Oman argues that the formal legal decision whether to enforce the odious pact between Antonio and Shylock in The Merchant of Venice does not depend on any deep deontological theory regarding moral autonomy or the moral duties of the contracting parties. (Indeed, deep down, we don’t really want the Venetian courts to enforce this wicked promise.) Nor does it matter whether the parties gave meaningful or voluntary consent, since the consensual nature of Shylock’s immortal contract does not detract from its depravity. More surprisingly, Oman even rejects economic theories such as efficiency or consumer welfare (the holy grail of economic analysis of law) as the legal reason for enforcing voluntary agreements. After all, the central lesson of Shakespeare’s morality tale is not about maximizing the sum total of the Venetian city-state’s social welfare.

Professor Oman thus points out a dramatic tension between our humane moral intuitions and the ruthless mercantile logic of the commercial Rialto in Shakespeare’s morality play: on the one hand, the pound-of-flesh contract should not be enforced in the interest of individual justice, but at the same time, the greater good—the integrity of Venetian trade in future deals—demands that all voluntary bargains be enforced. Oman thus makes an important and insightful observation about the immortal contract in The Merchant of Venice: “In the play, the law enforces contracts in order to make commerce on the Rialto possible” (p. 7). In a word, contract law is about markets, not morality. Why markets and not morality? Oman explores this question in greater detail. In particular, Part I of his book considers the close relationship between markets and morality, while Part II surveys such specific areas of contract law as the doctrine of consideration, remedies for breach, and contracts of adhesion (i.e. boilerplate contracts).

Part I is the best part of Oman’s book by far. Here, Oman explains how markets do more to promote “other-regarding behavior” in a pluralistic moral world (our world!) than other moral systems do. Why are markets such powerful drivers of morality? Among other things, Oman restates two important features about the process of contracting that, combined, work to incentivize pro-social behavior: First, “Each party to a market exchange has at least the nominal power to veto the transaction…. Second, exchange requires that each party pursue the other party’s interests to achieve his or her own interest” (p. 44). Although these oft-overlooked axioms about markets can be traced back to such 18^th century savants as Adam Smith and Montesquieu (the classical “doux commerce” thesis or markets[1]), Oman weaves them together in support of the following well-worn observation about the meta-morality of markets: the idea that markets create a transcendental space or robust framework in which people with radically different moral, religious, political views can cooperate with each other in mutually beneficial ways, or in Oman’s eloquent words: “Markets facilitate peaceful cooperation and coexistence in a pluralistic society” (p. 67).

In short, markets don’t just talk the talk of morality; they walk the moral walk. That is, although there are many competing sources of ethics and morality—including such sacred and profane institutions as the family, religion, and politics—markets do a more effective job of promoting peaceful cooperation and other-regarding behavior than these other moral systems do. In prosaic business terms, one could argue that there are many different types of “morality distribution channels”—i.e. many different ways of promoting morality, including politics, religion, and tribe. What Oman reminds us is that markets also constitute a separate morality distribution channel and that markets can do a far more effective job of promoting morality than these other institutions do.

After exploring the relationship between markets and morality (Chapters 2-4), Oman then delves into specific areas of contract law, beginning with the doctrine of consideration (Chapter 5). In brief, not all solemn promises are legally enforceable. To be legally binding, a promise must be supported by “bargained-for consideration” on both sides of the agreement. In practice, this means that the contracting parties must both give up something of value, or in the words of Professor Oman: “[legally-binding] contracts consist of promises made as part of a quid pro quo” (p. 90). By way of example, the immortal contract at the center of Shakespeare’s Merchant of Venice provides a textbook illustration of the common law doctrine of mutual bargained-for consideration. Shylock agrees to loan 3000 ducats to Bassanio in exchange for the legal right to take a pound of Antonio’s flesh in the event the loan is not repaid, while for his part Antonio gives up the legal right to a pound of his flesh in exchange for the loan. In other words: Shylock and Antonio both gave up something of value when they entered into their agreement, so their perverse promises are supported by bargained-for consideration and should thus be legally binding if the other elements of the common law are met, i.e. mutual assent, mental capacity, and lawful purpose.

But as Professor Oman correctly notes, the consideration requirement creates some practical conundrums when people want to make gifts, when they want to modify an existing agreement, or when they want to make option contracts. After all, where is the quid pro quo or mutual bargained-for exchange in these cases? Professor Oman’s solution to this problem, however, is simple and elegant: “In place of the doctrine of consideration as it now stands, I propose a two-part rule. First, all promises in furtherance of commercial activity should be presumptively enforceable. Second, bargained-for promises outside of the context of an established market should [also] be presumptively enforceable” (p. 100).

In other words, according to Oman, what should matter is not whether a promise is part of a quid pro quo but whether the promise promotes commerce and voluntary trade. In truth, however, although Oman frames his solution as a two-part rule, logically speaking his solution really consists of the following simple rule: all promises should be presumptively enforceable. Why “all” promises? And why “presumptively”? Presumptively because the other legal requirements of a contract must still be met, and all because most if not all promises either support existing markets or help to create new markets, and as Oman explains in Part I of his book, markets, in turn, are normatively desirable because they more effectively promote other-regarding behavior than other morality distribution channels do.

After tackling the legal doctrine of consideration, Oman turns his gaze to the structure of contract remedies in Chapter 6. He pays particular attention to two fundamental features of contract remedies—private standing and bilateralism—and argues that autonomy-based theories and efficiency theories of contract law are unable to explain or justify these twin features of contract remedies. (Although we agree with Oman that these traditional theories of promising are totally lacking, we would point out that his market theory of contract law also does not fully explain the remedial features of private standing and bilateralism.)

Briefly, private standing refers to the fact that breach of contract is not a crime or even a regulatory offense. Instead, it is the disappointed promisee who must take it upon himself to sue the breaching promisor, or in the words of Professor Oman: “Contract law does not enforce contracts per se; rather, it empowers disappointed promisees to act against breaching promisors through the courts” (p. 132). Bilateralism, by contrast, refers to the fact that the breaching defendant must pay damages directly to the plaintiff. For his part, Oman points out that such monetary damages are limited to “expectation damages” (i.e. the economic value of what was promised) or “liquated damages”—if these are clearly spelled out in the contract itself—but in most cases, the actual compensation a disappointed plaintiff can expect to recover for breach will be paltry at best or even non-existent, something that Shylock himself would discover to his dismay in Shakespeare’s Merchant of Venice. Moreover, as Professor Oman explains (pp. 129-130), contract remedies are generally weak for a variety of reasons: because penalties are not enforceable, because the law imposes a duty on plaintiffs to mitigate their losses at their own expense, because consequential damages (or lost profits) are rarely awarded to contract plaintiffs, and because each side must pay his own legal fees in civil litigation in the U.S. (the American rule).

For our part, we have always been puzzled why contract remedies are so damn stingy or why breach of contract is not a crime. After all, most District Attorney Offices have special units for prosecuting economic crimes, like passing off bad checks. So, why doesn’t the law empower D.A.s to prosecute bad contracts, especially if “well-functioning markets” (to borrow Professor Oman’s favorite phrase) are so sacrosanct? One possible answer to this puzzle is that many contracts and contractual relationships—like many markets—might be self-correcting. That is, so long as both contracting parties are concerned about their reputation, i.e. so long as they have more to gain by keeping their promises instead of breaking them, we might expect them to reach a mutual accommodation and work out their contractual differences informally in order to avoid the cost and uncertainty of litigation.

Oman’s pièce de résistance is his chapter on boilerplate agreements (Chapter 7), arguably the most important and original chapter in his book. In his boilerplate chapter, Oman bravely leaves behind the commercial hustle and bustle and Old World charm of the Rialto (as portrayed by the great Bard of Avon) and delves instead into the coldest and most inhospitable corners of the World Wide Web. Specifically, he swaps Shylock’s immortal contract in Shakespeare’s Merchant of Venice with those unreadable and hideous drop down “Terms of Use” and “Terms of Service” tucked away in the inner recesses of the Internet.

Since most arguments against boilerplate contracts boil down (pun intended) to aesthetic and moral considerations, simply reflecting what our academic colleague Tyler Cowen derisively calls “the fallacy of mood affiliation,” we won’t rehearse these well-worn anti-boilerplate arguments here. Suffice it to say that Oman does a capable job of restating and refuting all the standard objections to such contracts (pp. 135-141), although Oman notes (in circular fashion) that the actual terms of boilerplate agreement don’t even matter most of the time, except when they do! By way of example, we found the following passage in Oman’s book circular and thus unhelpful (p. 152, footnote omitted):

Frequently, [boilerplate] contracts are embedded in ongoing relationships between the parties characterized by a significant amount of give and take that ignores formal contractual language. … Indeed, formal [boilerplate] contracts frequently do not govern ongoing relationships between the parties. Rather, they are meant only to lay out so-called end-game norms that govern the breakdown of relationships.

In any case, Oman argues that boilerplate agreements should ordinarily be enforceable because such standard form contracts facilitate mass markets and mass commerce. Yet, the main problem with Oman’s pro-boilerplate argument is that it privileges “voice” over “exit.” For markets to function well, people need to be free to exit their commercial relationships, not just voice their complaints. But to the extent boilerplate contracts make the exit option too costly or difficult for consumers to exercise, such unreadable (and mostly unread) agreements won’t be self-correcting. Indeed, too much boilerplate might even end up stifling the emergence of healthy and well-functioning markets. Why not argue instead that there is an optimal level of boilerplate or that boilerplate contracts are simply a necessary evil—the price we pay for mass markets—and let courts use their equitable powers to selectively strike out any unfair or overly one-sided terms?

Worse yet, the last part of Nate Oman’s book is logically incoherent. He concludes by drawing a fundamental distinction between “pernicious markets” and “well-functioning markets.” This distinction is essential to Oman’s theory of contracts. According to Oman, contracts should only be enforced when they support healthy or well-functioning markets. To this end, Professor Oman identifies three types of pathological markets: (1) markets that produce harm, like the market in slaves in the antebellum south, (2) noncommercial markets, such as markets in human organs, and (3) malum in se markets or inherently bad commercial transactions. Imagine, for example, a judge conducting an auction instead of delivering a well-reasoned verdict in accordance with law. (As an aside, it’s worth noting all three of these markets are illegal under existing law, although the slave trade was once legal.)

Here, however, is where we part ways with Oman. At the end of the day, Oman’s tidy distinction between “well-functioning markets” and “pernicious markets” is badly confused. Why? Because once we draw a distinction between moral commercial practices and immoral commercial practices, then Oman’s commercial theory of contracts falls apart: the commercial nature of a particular promise becomes irrelevant to its legal enforceability. Instead, what ultimately matters is whether the contract is consistent with morality. But this conclusion brings us back to square one: why should the law enforce only “moral” promises and not “immoral” ones, especially when morality is almost always in the eye of the beholder? Was Shakespeare’s Shylock, to borrow Oman’s preferred example, acting morally or immorally when he demanded a pound of Antonio’s flesh as per their agreement?

Lastly, as a matter of logic, we could do without the qualifiers “well-functioning,” “healthy,” etc. to describe voluntary markets. Such qualifiers are totally superfluous, since any actual market is, by definition, well-functioning; otherwise, it would not exist. Despite these objections, we recommend Oman’s book to students of contract law. His work forced us to clarify our thinking about the relation between markets and morality. Markets not only promote economic efficiency (i.e. the allocation of assets to their highest valued uses); markets also enable people to serve the needs of others and cooperate in mutually beneficial ways even in the absence of political, religious, or ideological agreement. This last point—the ability of markets to meet human needs and bring diverse and self-interested actors together—deserves more attention.

Posted on 17 July 2017

F. E. GUERRA-PUJOL teaches business law at the University of Central Florida.