R3RUE Update

Warning: This post will be of interest, if to anyone, only to those intrigued by the arcana of the intersection of the law of contract, tort, and unjust enrichment.

Back in February I blogged about a conference on the "rollout" of the new Restatement (Third) of Restitution and Unjust Enrichment. Not many cases have yet cited to the R3RUE but last week Richard Posner of the Seventh Circuit Court of Appeals based in Chicago gave it a passing mention. The plaintiff in the case, Wilder Corp. of Delaware v. Thompson Drainage & Levee District (slip opinion here) had sold some real estate to a nature conservancy organization. The contract warranted that there were no petroleum products on the land. It turned out there were. The buyer sued the seller for breach of warranty and won. The seller, Wilder Corp. of Delaware, then sued the entity that had leaked the petroleum on the land, the local drainage district (a political entity in Illinois).

The basis of Wilder's suit was the common law tort of nuisance. After shooting down all the theories Wilder advanced for why the drainage district should be liable for its breach of contract, Judge Posner raised the doctrine of equitable subrogation, which is set out in the R3RUE, only to reject it. But he gave two, inconsistent reasons.

First, the court seems to say that equitable subrogation is inappropriate when the buyer and seller could have expressly provided for subrogation by contract. This contradicts R3RUE sec. 26. (Of course, no court is bound by any Restatement of the law. But it would be nice for a court that rejects a rule in the Restatement to spell out its reasons in some detail.)

The second, and much more persuasive reason for cutting off this line of attack on the drainage district, is that Wilder Corp.'s attorneys never raised it.

There is rarely a good reason for a court to reject an argument not raised by the parties and none appears here. Of course, Judge Posner rarely resists an opportunity to address the arguments he thinks the parties should have raised. The court's discussion of R3RUE sec. 26 is thus dicta and shouldn't dissuade other courts from considering it in a similar situation.

Preserving Relationships -- A Third Way (Part 2)

Yesterday, I outlined the argument of Hanoch Dagan that enhancing certain relationships justified the restitutionary remedy of disgorgement. Dagan correctly observed that the law awards supra-compensatory damages for a few wrongful actions, in particular, those involving violations of fiduciary and confidential relationships. These relationships involve a higher degree of trust than the typical commercial transaction. Thus, Dagan concludes, it is the law's goal to ensure that people continue to enter into such trusting relationships by forcing the wrongdoer to give back all that has been gained and not merely what was taken, i.e., disgorgement rather than compensation.

I found Dagan's argument interesting because he presented it as an alternative to autonomy- or efficiency-based ones. Unfortunately, I don't see that it's necessary. Both autonomy and efficiency can explain disgorgement and there is no need to posit a third way to justify it. Fiduciary relationships arise from contract but afford one party great discretion. The law remedies breach of the relationship because such relationships are valuable to the parties. It's not the relationship that we protect but the freedom of individuals to enter into it and/or the social welfare created by giving agents such great discretion. Autonomy or efficiency are enough.

Confidential relationships are not contractual but their abuse is usually wrongful, typically fraud, duress, or undue influence. The remedy of disgorgement is justifiable on ordinary tort theories and doesn't need a third way.

Perhaps we can glean a reason for Dagan's interest in moving the relationship rather than the parties to the center of restitution if we consider his lengthy argument in favor of restitution-based claims between cohabitants. "Allowing recovery for a significant asymmetric contribution facilitates the functioning of cohabitation as an intermediate institution, stabilizing and facilitating a relationship of long-term informal intimacy between marriage and arm’s-length dealings," Dagan writes. Clarifying his academic prose, Dagan intends restitution to provide a middle ground of legal protection for cohabitants between the rights of married individuals and the necessity of formalizing the cohabiting relationship through contract (a rather unlikely state of affairs).

I have no dog in this fight except to suggest that state legislatures and not state courts should lead the way in such matters of public policy. I find it interesting, however, that ultimately Dagan develops the relationship trope not so much to explain the existing remedy of disgorgement but to extend it into a new area.

Preserving Relationships -- A Third Way (Part 1)

Hanoch Dagan of Tel Aviv University is a prolific writer on topics related to contract law and its cognates. His most recent piece, Restitution and Relationships (abstract here) exemplifies what I find to be most interesting about his work. Most contemporary efforts in legal theory--an approach external to the law--seek to explain the foundation for a particular body law in one of two flavors: autonomy or utility. (It is this external approach that distinguishes legal theory from legal doctrine; doctrine attempts to rationalize and understand a field of law from an internal perspective.)

Autonomy assumes the perspective that the purpose of law--why it should exist--is to advance the individual's freedom of action. (Law here refers to private law as opposed to "public law" fields like criminal law.) Autonomy has little to say about collective benefits or detriments; only protection of the individual's personal integrity counts. Utility, on the other hand, takes the stance that law's validity rests on its ability to increase net social welfare. With respect to the individual, a utilitarian approach to the law operates to the effect that legal wrongs are okay so long as compensation is paid; no individual loss plus a collective gain justifies legal rules.

Autonomy and utility each have certain virtues in explaining the law that exists but neither can do a complete job alone, nor has anyone figured out a way to combine them consistently and coherently. At least that's what I argued here. Dagan agrees and suggests in his article that "relationships" provide a third way in addition to autonomy and utility that can account for a large area of law known as restitution.

Restitution is a remedy for unjust(ifiable) enrichment. Money damages are typcially awarded for breach of contract. Money damages are also awarded as compensation for a legal wrong, a tort. Restitution is usually awarded in the form of money but not necessarily because someone wronged another and not because someone failed to perform a contractual obligation but because someone was enriched without a good legal reason. The clearest example is restitution for mistake. Most everyone I should think would agree that William A. Macy should send the money back if my check to pay my Macy's bill somehow ended up in his checking account. And further, if he didn't, the law should compel him to do so. That's an example of restitution.

But Dagan has another application of restitution in mind, that which follows upon abuse of a fiduciary or confidential relationship. A fiduciary, like a lawyer, investment advisor, or trustee of a trust has always stood in a unique legal relationship with the client or beneficiary. If a fiduciary breaches a contract by, say, taking money held in trust, the injured client would, of course, have a claim for money damages, just like a run-of-the-mill breach of contract case. Yet, the law goes further and awards not only what was taken but also any gain that what was taken has produced. Thus, if a lawyer takes a client's money and buys some property, the client gets the property even if its value now far exceeds what the lawyer took.

Confidential relationships exist where one person in a close relationship so trusts the other that the other can easily take advantage of the relationship. Typical examples include a child who takes advantage of an elderly parent or parent who connives against an unsuspecting child. Here too the law of restitution gives not only what was taken but that into which it can be traced, all without giving the confidence abuser an offset for expenses. In short, the measure of restitution in both scenarios is disgorgement, not compensation

According to Dagan, neither autonomy nor utility can justify the potential for over-compensation in abuse of fiduciary and confidential relationships. Neither the personal integrity of one suffering at the hands of the dominant party nor promotion of social welfare accounts for disgorgement. Instead, it is the preservation of select relationships that is at stake. By subjecting a dominant abuser to the restitutionary remedy of disgorgement and not merely one of compensation for a wrong, the law does what it can to preserve such relationships.

As Dagan puts it, "by deterring breaches of the fiduciary’s loyalty, restitution plays a crucial role in vindicating the beneficiary’s entitlement to it, thereby preserving the integrity of the fiduciary relationship." The same holds true for confidential relationships. In other words, were it not for the legal remedy of disgorgement, people would be less willing to enter into fiduciary and confidential relationships. Thus, Dagan concludes, it is the relationships themselves and not autonomy or utility that justifies restitution.

Is Dagan correct? Does (should) enhancement of "relationships" justify at least some aspects of private law?