31 March 2016

Straining Toward the Natural Law: Margaret Radin and Contract Degradation Part 1

Speaking Aristotelian-ish, the social practice of contracting is an example of a formal means [cause] by which human beings achieve their natural end of flourishing. Flourishing entails growth in the virtues, one of which is justice. And among the components of justice is "commutative," which entails a rough equality in exchange. In other words, when all is said and done, a contractual exchange of money (or information) for goods or services should be a fair one. (Caveat: a fair exchange need not be on arithmetically equal terms; it need only be a fair chance at arithmetical equality.)

Contract law exists in part because sinful human beings sometimes fail to contract in a just manner. It's unlikely that contractual assent produced at the end of a gun represents a fair exchange. Contract law thus concludes that the party under duress need not uphold her end of the bargain. (Indeed, the law of unjust enrichment goes one step further than contract law and permits such a victim to recover what has already been transferred.)

But what about contractual assent to terms that a party had no knowledge and, even if the terms had been known, wouldn't have been understood? I'll Margaret Radin provide an example taken from Access to Justice and Abuses of Contract (download here):
Facebook promulgated new terms of service in January 2015. Many readers of this essay, perhaps a large majority, are users of Facebook. But very few users know that new terms were imposed recently, and fewer have read them.
If someone did read the terms and wished to disconnect and delete her account, she would discover that certain things will nevertheless stay in Facebook’s power: “Information associated with your account will be kept until your account is deleted, unless we no longer need the data to provide products and services.” [italics added] Moreover, “information that others have shared about you is not part of your account and will not be deleted when you delete your account.” In other words, Facebook will continue to feature your stories and photos in advertisements. You are deemed to “agree” to Facebook’s terms by having continuing to use Facebook after January 1, 2015.
Facebook's terms of service are relatively benign, and use of Facebook is without charge to its users. (It's marketers to whom Facebook sells information that make it extremely profitable.) Nonetheless, all of us have clicked "I agree" for goods or services that we have purchased that include sets of terms we have not read, and at least some of which limit our rights (e.g., to complain publicly about shoddy products or to litigate if the other party breaches). Are such terms a legitimate part of the social practice of contracting? In other words, do they represent a rough equality in exchange? And, even if they don't, should the law of contracts do anything about it?

On the one hand, contemporary contract law is agnostic about the legitimacy of such terms. In other words, the law doesn't care about (or perhaps doesn't believe in) commutative justice. And even if a judge believed that a contract was using terms in an unjust manner, he must conclude that contract law as it now exists provides no recourse. Unlike an unfair exchange produced at the end of a gun, an unfair exchange produced by terms is beyond the power of the law to redress.

Radin, on the other hand, says no, such terms are not legitimate; and yes, the law of contracts should do something about them. But, one asks, how does she know any particular term and the resulting exchange is illegitimate? And how does she argue that the law of contracts should do something about it?

With respect to the first question, she suggests that terms in contracts for goods or services for which there is market failure are almost certainly so one-sided as to be wrong. Market failure occurs in the presence of two factors: (i) when a rational consumer cannot acquire sufficient information about the product to evaluate its value and (ii) the term disclaims liability for damages caused by the product's defects. Consider Radin's example:
Fine print embedded in a composite product may be deployed in a non-competitive market or in a market in which too many consumers lack information about the product, a situation that leads to a race to the bottom. If consumers do not have the information needed to evaluate a product (a situation known as information asymmetry, because the firms themselves do have the information about their products), firms can lower quality without lowering the price, or can lower the price but lower quality more. When that happens, firms that do not lower quality will receive lower revenues and perhaps be driven out of the market.
Even if we agree that there's something "wrong" about that, what should contract law do about it? Are civil governments in the business of reversing races to the bottom? Surely, no one wants to pay more and get less but why should courts or even legislatures get involved in fixing this problem? At this point Radin provides no argument relying, it appears, on moral intuition. (For the limits of moral intuition as a basis for human rights, not to mention contract remedies, see my piece Looking for Bedrock.)

Is there an argument that would warrant Radin's desire to modify the rules of contemporary contract law and forbid certain disclaimers? As I suggested in Who Bears the Burden? The Place for Participation of Municipal Residents in Chapter 9, public choice theory may be that argument. Can disallowing disclaimers in conjunction with defective goods be justified by application of public choice theory?

Let's start with the first question: What is public choice theory?  Public choice theory provides a framework of analysis to identify public goods, goods that that should be provided by civil government at taxpayer expense. Other goods are private and need not be provided by civil government. Public choice theorists posit two markers to distinguish public goods from private ones: First, quoting from Who Bears the Burden?: "A public good is one which should be produced, but for which there is no feasible method of  charging the consumers." Second, provision of such goods at public expense prevent the problem of free riders, those who would take advantage of a good, such as residential streets, without paying. If non-payers can't excluded from using a good without paying, free market participants won't provide (much of) it.

On such an understanding, is a right to claim damages for breach of contract a public good? It seems not: the remedy of contract damages--like the practice of contracting--is a private good. Thus, public choice theory does not justify disallowing contract disclaimers. (Indeed, as I argued in Principled Pluralism and Contract Remedies, civil government need not provide a remedy for breach of contract although it certainly may do so.)

Well, if not public choice theory, is there any other foundation on which to base a rule disallowing disclaimers? There might be, and that's where the need for a substantive account of natural law becomes necessary. Radin and other Progressives are onto something--enforcing unbargained-for disclaimers of remedies for breach of contract may be unjust--yet the thinness of the Progressive account of justice fails to provide warrant for their disallowance. By contrast, a natural law account offers a basis for limiting the ability of one party to use the form of contract to deny its substance.

1 comment:

  1. Fascinating post. Could you clarify two points? First, you write "the remedy of contract damages--like the practice of contracting--is a private good." I certainly see why a monetary award received and held by a successful plaintiff for breach of contract is a private good. But I don't understand why the practice of courts' remedying of breaches of contract concerns only private good.

    To the contrary, if courts create a state of affairs where the public knows that a breach of a private contract may be remedied, then it creates public conditions where people may contract at lower costs and with greater confidence. Courts thereby facilitate more commercial transactions by lowering transaction costs. Courts may also promote the moral development of personal responsibility in taking responsibility for certain commitments with others and making amends for harms caused by failing in those commitments.

    Isn't the state of affairs where commercial transactions are cheaper and more frequent a public good because it should be produced but there is no plausible way for private parties to charge for the costs of creating it, e.g., by general public honesty in transactions, and even if private parties could create similar kinds of public confidence in commerce facilitating contractual enforcement, free riders could take advantage without participating? Same for the moral community created where widespread virtues of responsibility in making agreements is cultivated by the many but taken advantage of by the few?

    Second, in your discussion of the type of justice relevant to contract law, you follow the later typology in distinguishing between commutative and distributive justice which emphasizes equality in the exchange, rather than the older tradition distinguishing between rectifying and distributive justice, which emphasizes reestablishing equality of position after a harm. If we consider contract law to be concerned with rectifying the distinct kinds of harms that arise out of the breaking of contracts, i.e., enforcing the obligations that arise to remedy harms caused by certain and only certain kinds of contracts, would this make the analysis above easier than when we focus on equality in bargains as the essence of contractual justice? The issue then would begin with whether there is a harm in breaches of these kinds of terms. We might address this in terms of whether the public goods of contracting related inter alia to more efficient transactions if not also to cultivating virtues of responsibility for what people have consented to would or would not be promoted by enforcing such terms.

    Thanks again for the interesting post.