How Insurance Works

Fault in Contract Law: George Cohen, “The Fault that Lies Within Our Contract Law”


GEORGE COHEN: All right. Thank you for having me. My paper is a little
bit different, I think, than a number of
the other papers. I guess it’s somewhat in the
vein of Dick Craswell’s paper in trying to sort of
make some general points and some observations about the
debate between strict liability and fault in contract law. So I thought I’d start out
by just giving some thoughts about what the debate is
about, what really turns on it, because I think, you
know, some people including Eric yesterday I think
raised a legitimate question about how much of a difference
does this really make and it could be that the
difference is not very much. One may be a
difference on emphasis. And some of you
may have noticed, the best thing I
like about my paper is the title because it’s
an iambic pentameter, which is the only time I’ve
ever been able to– AUDIENCE: A man of the soul. GEORGE COHEN: Yes, yes. No. But the interesting
thing is that there is someone who recognized
that, at least implicitly, at that’s Judge Posner,
because you’ll notice his paper is also in 10 syllables,
but the accent is on the first syllable. I don’t know whether he did
that intentionally or not. I bet he did. But I think it really is a good
way of sort of highlighting the issue of
emphasis, that is it may in part be a question
of what are you emphasizing. Are you emphasizing the
strict liability part, and then there are
exceptions for fault. Or are you emphasizing
the fault part, and there are exceptions
for strict liability, similar to the point that Stefan
Grundmann was making yesterday as well. All right. Sometimes I think that
the question of emphasis can make a big difference in
the way you characterize things. I know Judge Posner’s going
to talk about in his paper the idea that these
labels can be misleading. Calling something
bad faith is perhaps less informative than
saying exploitation of situational monopoly,
or something like that. But sometimes it can cut
the other way as well. That is, for example, that
there was a famous comment that Ken Arrow made on a
famous paper about moral hazard by Mark Pauly,
where Mark Pauly had made this observation that,
well, moral hazard is just rational economic behavior. It’s just someone doing
a cost benefit analysis and acting in a rational way. And Arrow says, well, yeah,
that’s true to some extent, but it’s also– there is some justification
calling it moral hazard. And then the
sentence that he gave was “Well, no doubt Judas
Iscariot turned a tidy profit from one of his transactions,
but the usual judgment of his behavior is not
necessarily wrong.” Which I think is a way
of saying that there may be some value
in these labels that we put on things
too, and calling them just costs or benefits also has some
implications that we may not always want to follow. So the question of
emphasis is one question. The second might be
a question of impact. That is, does it actually
matter in individual cases whether we have– say, we have a strict
liability system and have these
exceptions or, say, we have a system
that’s fault based and have pockets of
strict liability, or whatever you want to call it. And you know, probably
in most cases, you know, which– how you
frame it doesn’t make a huge amount of difference. But there may be some cases– I actually cite one
case that I found kind of interesting from the
Chancery Court in Delaware, this [INAUDIBLE] case where the
court actually makes reference explicitly to the
strict liability idea. It was a case where there was
a commercial landlord that was selling a piece of property
and had agreed, or entered into a contract. And one of the obligations
of the contract was to secure tenant
consent in connection with selling the property. And they weren’t able
to get tenant consent. And the question
is, well, you know, what’s the consequence of that? At the court looks at
the contract, and says– and they say an
argument that I think is perfectly plausible
in a number of contexts, well, in other areas
of the contract there were best efforts
provisions put in, but not in this one. And so this obviously must
have been strict liability, because that’s the general
understanding of contract. And so there was a strict
liability obligation to do this. And so you have breached. And the court didn’t
really talk about damages. The court did say you couldn’t
get specific performance because you can’t force them
to get the tenants to consent. But the court, I think, was
influenced by this idea, well, the contract’s a
strict liability, so that’s what we do. And that’s the background
norm, and the best efforts are the weird things. And so if you don’t
specifically say that, then we’re going to assume
it’s strict liability. And so, there may be cases
like that where it may actually make a difference what your
background framework is about the nature of
contract liability. And then the third
aspect of the debate is the question of
theoretical direction, which I think is much more focused
on Bob Scott’s paper, where I think he and I have
some disagreements of that, about the way contract
theory ought to go. And we’ve certainly
talked about that. And I’m sorry he’s not
here to sort of defend his position on [INAUDIBLE]. He’ll do an excellent
job on that. But the so called new formalism
approaches to contract– and I think Bob’s
paper points that out– has some connections with
the strict liability idea and seems to be pushing
more– or asking us to push more in the direction
of strict liability approaches. So my basic thesis
is relatively simple. And it’s, I think,
ruined by the number of things that people have said
yesterday and this morning. And that is that fault is an
inherent and unavoidable part of contract law, and that’s
a good thing, from both an economic perspective or
other perspectives as well. And that the
justifications that have been given for strict
liability systems tend to rely on
oversimplified notions of both contractual
intent and fault, and that fault is not only
unavoidable and inherent, but it’s also pervasive. It’s throughout contract law. It’s not something
where it’s just limited to individual different areas. It’s not, maybe, the
starting point but it sort of infuses itself in
all aspects of contract law at different
times, whether we’re talking about the formation, or
the performance, or the remedy. The focus in a conference
here, for the most part, has been on
performance and remedy. Naturally, because
performance is where we see the restatement
in cases most emphatically. And we’re seeing a strict
liability principle. And the remedy because
of statements by Holmes and others that the
reason for the reach doesn’t matter in determining
what remedies are, a view that I disagree with. But that’s certainly a
well understood statement. And then formation, we’re– although it hasn’t been
talked about as much here, I think there have been
some references in some of the papers. But there, it’s the reason
for failing to contract that is deemed not to matter. And so, I think it’s important
to recognize that the fault ideas that come out of
all these different areas because that I
think has relevance to several aspects of
the argument in favor of strict liability. It’s not– first of all, it’s
hard to sort of characterize a system as a strict
liability system if, you know, fault pops up in
other areas, sort of like what I like to refer to
as the water balloon theory. You know, you push the water
down, it goes somewhere else. And so, what’s the
point of saying, well, you have a no fault system
just for performance but not for these other things. It only really works
if you’re going to do it across the board. OK. So, I then talk a
little bit in the paper about different justifications
for strict liability, both what I call sort of vaguely
traditional and economic kinds of approaches, maybe unfairly. I don’t really attribute the
traditional approach to anyone. The traditional approach seems
to go something like following. Contract– you know,
we’ve talked a lot about the distinction
between contract and tort. The main idea is that
contract’s about intent and tort is about something beyond the
intention of the parties– a fault, a social judgment
of some kind or another. And interestingly enough,
you look at the brochure that we put out for
this conference, you have all these
people pointing at one individual person. It’s not a two
person thing, which is what you’re going to
think of as contracts. But there’s a whole
group, the whole society, is putting the finger
at the wrong-doer, which is kind of the idea that
this is a social judgment. It’s not just an individualized
concept of fault. And I think there’s
something to that. But it still leaves the
question of OK, well, if contract is about
intent, how do we know what the intent of the parties is. How do we know they don’t
really intend to incorporate fault-based liability? So that’s one of
the key questions. Now, the economists have
an approach to fault which basically
says, well, we ought to look at what we think
the parties would reasonably have done. And sort of [INAUDIBLE] that to
the intention of the parties. That’s when we figure
out what intention is. And, the way that that can
lead you to a strict liability system is to focus on
several different things that I summarize in the paper. You could focus on some version
of the superior risk bearer, or whatever you want to call it,
kind of theory, where you say, well, in general, on
average, the promisor is the better risk bearer,
caution taker, mitigator, what have you. And that justifies
strict liability because it’s better
to have, let’s say, an across the board rule
or something like that. You can focus on
litigation costs, as a number of the
papers do, that says that fault is always
costly to litigate. You can say that, you can focus
on comparative institutional confidence, and say,
well, the parties are better able to sort
of figure out fault and incorporate it
when they want to. And I think there are
some problems with all of these kinds of arguments. The problem with the
superior risk bearer is, as many of the papers
here have pointed out, it’s not always true that the
promisor is the superior risk bearer. And to the extent that we can
reasonably identify categories or other situations of
cases where that’s not true, it makes sense or
it stands to reason that you would have
exceptions to strict liability that incorporates
some aspect of fault. With respect to litigation
costs, you know, there’s some ways in
which that might be true that the fault system is
more costly to litigate. But I think Richard
Epstein’s paper, and others, I think demonstrate that that’s
not necessarily true either. You can have
categories of behavior. You can have presumptions. You can focus on custom. Fault doesn’t have
to be, as I say in the paper, a free for all. And also to the extent
that fault shows up in lots of different areas
of contract, the fact that you saved some
litigation costs on the question of
performance, if you wind up litigating the same issues
on damages or on, you know, whether it’s a divisible
contract or a contract as a whole, you haven’t
really saved anything. It’s one big case
where everything is sort of litigated. And so, what you have to say
is, again, strict liability has to apply across the board
in order to really recognize these savings. And that’s not always true. OK, so then what I try to
do in the rest of the paper is talk a little bit about
intent and what that means, or how one might
understand that. The key idea here,
I think, is the idea that intent is very
often uncertain. And the best evidence of that
is that we have contract law. That is, if intent was
always easy to figure out, you could have one rule,
which is sort of what I tell my students on the first day. There really is only one
rule in contract law, right? You enforce the mutual
intention of the parties. And then the rest of the
course is figuring out what that means. And that’s what contract law is. Contract law is giving
us sort of guidance, or giving court’s
guidance for figuring out how we figure out what the
intentions of the parties are, with some exceptions. But that’s the general
idea of contract law. So how is intent uncertain? It’s uncertain in a lot of ways. To sort of pick up on a
variation of Dick Craswell’s paper, all right, you can focus
on different aspects of intent. You know, we talk about
Jacob & Youngs, right? Is the intent that
matters the intent to have a well built
house, in which case there’s no difference between
the Cohoes and the Reading. It’s the intent to
use Reading pipe, which is the way the
dissent understands intent. That’s the relevant intent. That’s the only question. So if you frame intent
that way, then it’s an easy case for the dissent. So you can have differences
not only in, you know, how you define wilfulness,
but how you define intent. Which kind of intent
should we focus on? There are, as I point out
in the paper, differences between what I refer to as
primary and secondary intent, right? There’s the intent,
under the contract, what are we supposed
to do or not do. And then there’s the intent
about how we should figure out what that intent
is, which as I said, is mostly what
contract law is about. Sometimes contracts
talk about that as well. You know, we’re going
to give courts guidance. We’re going to put in
a merger clause that tells us how we want courts to
figure out what our intent is. But if you have more than
one intent or different kinds of intent, then you have to
make another decision, which is which takes priority. Does one always take
priority over the other? And how do you figure that out? So it complicates the
question of intent. Yesterday there were some
people who talked about the fact that you have complicated
projects where there’s lots of different
promises being made, construction being the
sort of paradigm example. That also complicates
the problem of intent. Something that I
mention in the paper that people haven’t
talked about yet is that very often there
are agency problems that create problems of intent,
especially when you have different people who
negotiate the contract, write the contract,
enforce the contract, litigate on the contract. And there are a whole
number of contracts cases where really why
the dispute happens is because there’s been
a change in the agents, so change in management,
or the analogy under consideration cases. You know, the
promisor dies, and you have the estate that’s suing. So there’s a change in
the cast of characters. It’s not one person sort
of changing their mind. Although that happens
plenty of times as well. But how we ought
to deal with that, how we ought to think about that
situation is important as well. So once we complicate
the idea of intent, then the supposed
dichotomy of what I call the traditional view
between fault and intent– intent is about what the
parties want and fault is about some social
judgment– kind of, it doesn’t dissolve
completely, but it becomes a lot more blurred. Because now, you
can have all sorts of ways in which
fault and intent can be perfectly inconsistent. Not only because the
parties may expressly adopt fault kinds of terms,
but because it may make sense to imply intention to accept
some kinds of fault judgments in different kinds of cases. And fault can be
viewed as tie breaker. That is, fault can help
us understand intent, not something that’s consistent
or completely dichotomous from intent. And so, once we
recognize that, then it’s not that hard to
say that it makes sense to view contract as an
intent or fault based system. And it’s only if you have
a very strong idea of this is what the intention of the
parties is and I know it, and I know it with
great certainty, then there becomes much
more of a dichotomy. That’s not to say that
there aren’t cases like that where parties
explicitly say, you know, we don’t want intent to come in. We want warranty, we
want an option, right? This is part of the discussion
with Seana Shiffrin yesterday, the debate about option. And this also, I
think, goes in part to the question of
emphasis and vocabulary. I think one of the interesting
things about that debate, at least to me, is
to me an option, I mean, that’s very
powerful rhetoric, to call something an option. The reason it’s powerful
is because the usual idea of an option is you can not
accept it for whatever reason you want– good reason,
bad reason, any reason. So it’s like equitable
employment and things like that. So calling something–
saying that a promise is an option, to me, has this
inference that there aren’t any justifications, there
were aren’t any bad grounds for saying no. Where the discussion, I
think, with Seana yesterday was leading to a more
nuanced view, which is that well, no, there are some
cases in which it makes sense to sort of– that is, that there are some
things that are taken off the table when you
make a promise, and we can disagree obviously
about what those are. But I think there’s
something to that idea. I try at the end to talk about
different ways in which fault appears throughout
contract doctrine, putting a little more emphasis
on some aspects of formation than I have in the past, because
I talked about in other work remedies and performance. One thing that I
mention in particular which I think is
kind of interesting is the rule of Sections 20 and
201 of the restatement of rules that we usually talk about
in contracts in connection with the Peerless case. That’s Section 20,
which is really about if you accept the court’s
understanding that the parties had no meeting of the minds. That is– and that neither
side is really at fault, where the restatement endorses
the view that there shouldn’t be a contract at all. But the more interesting
thing about Section– both Section 20 and 201 which
is about interpretation– is that it endorses a
kind of– explicitly a kind of false standard in
the idea of reason to know. If one person has reason to
know what the other side wanted, that person’s going to lose
under Section 20 and 201. And it’s kind of interesting
that, you know, there in sort of the
foundational– two of the foundational
sections, one might think, of
the restatement– although, you know,
they’re not heavily litigated– you have fault
being explicitly written in to the docket. So that is– so I go through
other examples in the paper, but I won’t do that here. And then, finally, just to
finish up with two other points that I make, and then I’ll stop. One is the sort of, what I
call in a cutesy kind of way I guess, what might be
viewed as the court’s theorem or the legal
realist point, which is again a variation on
the water balloon thing. The idea here being
that it’s, you know, even if you
wanted to, even if you thought it was crazy
to have a fault system, it would be very hard to
eradicate it completely. Because fault is sort
of an inherent part of our normative world. Everyone makes judgments
about good and bad behavior. That’s how we live our lives. Judges are people
like everyone else. They are going to be
influenced by what they view as good and bad behavior. And if you sort of shut
off one valve for them to let those notions
come out, they will find some
other way to do it. And I make a suggestion. I’m curious to hear what
the game theorists think, but you know, one of
the interesting things or constraints I think of
the game theory approach to some of these situations is
that the courts are not viewed as participants in the game. They’re viewed– basically
the rules are set. And it’s the parties
who are the contracting parties who are the players. And they sort of
work out things. And then the courts just
enforce whatever the rule is. But the reality of
the way law tends to works is that courts
are sort of a part of the ongoing negotiations
in some broader sense. They are really players. They’re also responding
to what people do. And if they see bad behavior
going on, they smack it down and that then becomes
incorporated into the law. So that’s my view of
how fault is inevitable. It’s going to come in
whether we want it or not. It’s not to say that strict
liability has no role. I don’t think that’s true. I don’t think anyone can
possibly say that that’s true. I think we have
very strong impulses in the strict liability
direction too. What I try to suggest
is one way to understand that is that we have very
strong commitments to deterring certain kinds of opportunistic
and other bad behaviors by promisors. And so strict liability is a
way of expressing that view. But it is only, in
my opinion, at most a presumption that
can be overcome in a variety of different
ways under different fault standards. OK. So I’ll stop here. Yep. AUDIENCE: I was hoping you
were going to get to Section 20 [INAUDIBLE] said you
want to sandbag you with something that was in
your paper, but not your talk. Let’s talk about Lefkowitz. When Lefkowitz tries
to go to the store the second Saturday to
take the store up on the– does everybody have– I’m sorry. Assuming everybody
knows, this is Lefkowitz versus Great
Minneapolis Surplus Store, you know, the ad, first
come, first serve. One minute. 9:00 AM Saturday
morning, the first time he goes to the store,
the store tells him they have a store rule, that
the sale is actually only available to female customers. They run a similar ad next
week, different items, but same basic terms. And he shows up. And again, they turn him away. Russell Crock and
I have been kind of going back and forth on what
the court got right or wrong, leaving aside whether they
explain it right or wrong, correctly or not. But his argument is that
[? Lefkowitz ?] should have known of the store’s policy
and so shouldn’t have assumed he was able to accept
the offer, assuming that the ad was an offer. My argument is that
the store should have know of Lefkowitz’s
understanding of their ad. And they were in
a better position to change the language of the
ad than all of the Lefkowitzes out there to understand
that there was an unwritten rule that applied. What’s your take on it? GEORGE COHEN: What’s
my take on it? OK, well– AUDIENCE: You can
side with Russell. it’s OK. GEORGE COHEN: No, no, no. I mean, it’s kind of
an interesting case. But I think that the
debate is similar to– the debate you’re having is
what would people reasonably expect [INAUDIBLE]. And would they expect
that this would be something that would be
specifically available to them. You know, the general question
is an advertisement offer kind of thing. And we talk about the idea
that well, generally, they’re not because they may run
out, and things of that sort. And you might say, well, OK,
but maybe we should force the– make them offers and enforce
people to put it a disclaimer, or you know, rainy day thing
or first come, first serve, you know put it in
explicitly, which is what happens in Lefkowitz. So, yeah, I think
there are certainly arguments to be made
about you could view it as a kind a precaution thing. You want to put the
burden on the store to make their
advertisements clearer, or something like that. Or you could say,
well, Lefkowitz should have reasonably
understood that this is not going to be enforceable. So I think those
things are debatable. But what I think is interesting
is that I think that those are debates that we have, where the
debates are about, you know, it’s a kind of, you know,
who’s in the better position to have done something about it. And there can be reasonable
disagreements about these in marginal kinds of cases. I mean, Leonard and the Pepsico
and the Harrier Jet case is another example of that. You know, was Leonard a sort
of sleazy guy because he was trying to– he knew that
the Harrier Jet ad in Pepsi wasn’t going to be enforceable,
so he was just figuring he was going to get some
money out of these guys, or was it Pepsi
that’s more at fault because they could
easily fix it, right? So my particular
view of something like that is that Leonard
makes sense if you view Leonard as the sleazy guy. And Pepsi, they may
have been negligent, but they weren’t sleazy. They weren’t trying to
take advantage of him. And so, if you sort
of view Leonard as sort of the grabber,
the unreasonable grabber, that case makes more sense. So I think that those cases
raise those kinds of questions, just like the performance
and the damages cases. Yeah? AUDIENCE: When you’re
discussing the paper, and also when you related
to it in your presentation, so rather there could be
different justifications for strict liability contracts. And you argue,
among other things, that those justifications
are not so inclusive, one of those litigation
costs, for example. You say, well,
this is not– and I guess that you can
also look at a tort and say, wait,
[INAUDIBLE] torts, right? In torts we know
that [INAUDIBLE]. So it could work. So probably the litigation
costs are not so high. So even tort strict liability
may have some advantages there. The costs are not
prohibitively high. What I wanted to ask you
is, actually it relates to– it was also discussed by Eric
yesterday, more in the paper than in your presentation–
which is the verifiability. Right now, you could
say that verifiability is very close to
litigation costs, right? Because if something
gets unverified, it means that we
need more litigation to know what [INAUDIBLE]. And again, you could
say, so there could be a problem of verification. Sometimes we don’t know whether
the [INAUDIBLE] was at fault or not. But the same thing will happen
also in torts, [INAUDIBLE] we don’t know whether
it was at fault or not. So it seems to be
the same thing. Now, what I would like
to ask, and suggest to hear what you
have to say about it, is that in fact there is some
very substantial difference here between the breach
on one side, and a tort accident on the other side. Now, you take tort accident,
usually what happens, one thing, we can
see an accident. On many occasions, just
looking to the accident, we have kind of a strong prima
facie case of negligence. Like if somebody drives
his car and hits someone. And he seems to have
no special reason. There’s kind of a prima
facei case of negligence. Maybe sometimes it
can be reverted, but in most of the cases
it’s relatively easy. And we also know that when
courts apply the negligence standard in torts, they
usually focus [INAUDIBLE] activity level, for example. They just focus in the
more immediate causes of the accidents. So it is relatively easy. And we also know from
torts that they don’t look at the activity level. So in order to
influence activity level in strict liability, also in
torts, it’s solution, right? Sometimes influence
of where if it’s very important to [INAUDIBLE]
the problem of verification really have, then this is
a possible justification to strict liability. And I would like to
suggest and to hear what you have to say about it. Maybe in contracts in
different, because usually what we see in contracts– we
don’t see kind of tort exhibit. We just see non-performance. That’s it. We can say nothing about
it just by looking at it. And maybe on many
occasions, the inquiry is there is much more
problematic, much more similar to activity
level in torts, right? And exactly as in torts,
we prefer strict liability in those situations that we know
that there is a verification problem. Maybe in contracts, this
is the regular case, right? So the exception maybe
in torts is that– right? I mean, so what do you
think about these arguments? So the argument is
that in contracts, in a breach of contract, to
know whether it was at fault or not, to know whether it
was efficient or inefficient breach, is much harder to
verify comparing to a tort case. And that would
justification, why we see, after all, more
strict liability in contracts than in torts. GEORGE COHEN: All right. I’ll have to think about
that a little bit more. I think that obviously
you can complicate it in a variety of ways. I mean, you can
say in torts, yes, in many cases there
is [INAUDIBLE]. And the fact that
there’s an accident shows that someone must
have been careless. But there are other
cases where there’s no necessary implication just
from the fact of the accident, that something that
happened to someone, someone had to have been
negligent somewhere, someone had to have
been at fault somewhere. So there are certainly
cases like that. But you’re making more
of a generalization. I mean, on the contract
side, you know, I guess, you could say, to me, the
way I think about it is, yeah I think there’s something
to the idea that, well, mere fact that non-performance
has occurred is itself– you know, you could
view it as at least presumptively, faulty behavior
on the part of the promisor. Right? That’s sort of the
traditional view, right? You know, the breach is the
wrong, you know, kind of thing. And so, I mean, it’s not exactly
your point about verifiability, but maybe there’s
some connection there, that you know, as a starting
point, as a presumption, we ought to say, OK, well,
look, there’s a breach. Probably that means the
promisor did something wrong. And, you know, we’re not
going to get into that one way or the other unless
there’s a good reason to, so we say, you
know, strict liability. All I want to say
is that that may be true in a certain
number of cases, but we should view it as what I
call a fault-based presumption. That is, there should always
be– and this is consistent, I think, with your paper–
that there should always be a chance for the other side
to say, OK, well, in general, that may be true, but
in this situation, it doesn’t make sense
because of x, y, or z reason. And I believe that
there are ways to limit that, so that it’s
not a complete, you know, you can raise anything
whatsoever under the sun, but there are
categories of things, at least, that you can
use to rebut situations like in your paper, or
other kinds of things where it did make sense to
allow some kind of rebuttal. Richard. AUDIENCE: Yeah. My question is
essentially to ask you to continue your answer
in the following way, which is to actually to
do the demarcation. Your last remarks in
the general presentation was that there’s always a
move to strict liability, and then the fall thing. And so I think what
we’re going to have is a classification
where the prima facie case is going to be
one in some cases, and then the other in another. And then also since
a lot of these cases involve not just a
prima facie case, but much more complex situations
like excuses for conditions, you might even have a
merger of stuff in this. So I’m curious as to how
you’re going to do it. Be more concrete about it. We’ve heard basically two
efforts of classifications. One, the one that Stephan gave,
and the one that I gave them. His mainly on the
service goods line, and mine sort of fractionation
inside the service class. And I’m just curious
as to whether or not using your approach
would be consistent with, would compel the
requirement to this thing would be empathetical to
the sorts of classification judgments that we made. Even though they differed
a little bit at the edges, I treat them essentially as
concurrent or concordant. Are you going to join
our anti-hand club, or are you going to find
yourself a starting member of something else? GEORGE COHEN: No, I’m very
sympathetic to your position and the categories thing. You know, I have to
think more about– I read the paper, but I’d have
to think more about, you know, how closely I went. But I didn’t see anything in
the paper that I disagree with. So– AUDIENCE: [INAUDIBLE] GEORGE COHEN: Well, no, no. And the goods thing I
think is exactly right. I mean, to me, what I wrote
about in my damages paper is that I think Holmes in sort of
typical judicial overstatement, basically made the
statement about, you know, the reason for the
breach doesn’t matter. But it makes perfect
sense in the goods case, where there’s fungible goods
and perfect substitution and everything. Because as, you know,
others have pointed out, essentially that the contract
market differential gets you all that you need, right? It discourages the
breach to take advantage of a change in the market
price, so it disgorges, as [INAUDIBLE], and
Peter said yesterday. It disgorges the gains. And it also, in line with
what Saul said in his paper, encourages mitigation
on the other side. It’s the best of
all possible worlds. So if you have this
ideal, you know, completely fungible
goods situation, you don’t need anything other
than the warranty damage. And Holmes was exactly right
in my view in that case. But the question
is, what happens when you get beyond that case? When you go to
the services cases where the presumption is
sort of the other way, you know, does Holmes
carry over there? And I think that,
in some sense, we may have been too quick
to sort of carry over that general theme to situations
where I don’t think it’s as [INAUDIBLE]. Yeah? AUDIENCE: Can I
pressure you on what I think is going to be
Dick’s point later, which is I’m not quite sure where
you’re talking about in Section 201 or Section 20,
what work exactly the fault language is doing. [INAUDIBLE] could
interpret these cases– for example, there’s a case
last year from Delaware where you had two
law firms negotiating with each other over a
$100 million [INAUDIBLE]. Neither one of these [INAUDIBLE]
but ultimately the court says there’s a duty of
the forthright negotiator. If one person understood
there was ambiguity in the contract, the
other person didn’t [INAUDIBLE] the
ambiguity in the contract or didn’t know– you
know there is ambiguity, you know the other person
doesn’t know the ambiguity, it makes sense for
you to disclose or be responsible for the
other person’s interpretation. I don’t think of
that as fault. I just think of that as a
sensible way to make sure that contracts are clear and
parties know where they stand. And the more general
point I take it to be, we can use the word fault
in these circumstances, but again what
we’re trying to do is to come up with
reasonable duties that would make
everyone better off, and that attaching moral
weight doesn’t really have any cash value to it. GEORGE COHEN: OK. Yeah, well, I mean, the debate
about whether you should sort of throw moral
kind of language on it, I don’t want to get into
that debate so much. I mean, the key thing is
I don’t disagree with you. I think that that’s what we are
trying to do in these cases. All I’m trying to say
is, whatever approach– that that approach is not really
a strict liability approach in the sense that all
you have to do is say, this person made
this promise, this is what it means, you
know, or plain language, whatever you want to say. Why are courts asking, you
know, what did you know about what this person did? I mean, yeah, they’re just
trying to figure out intent. But all I’m suggesting
is that there’s some kind of fault component
already built into that. In the same way that, you know,
the objective hearing contract itself, to me, is really
a fault based idea. That is, why wouldn’t we allow
a subjective view to prevail? Well, there are a
couple of reasons. You know, one is if you manifest
intent and someone is misled, you are somehow negligent
in having misled someone into thinking there
was a contract. Or, maybe you’re just
lying, now that that was your subjective intent. But that’s the
opportunistic story. So under both stories,
the objective [INAUDIBLE] makes sense. Where it doesn’t make sense,
or where it makes less sense, is where those
presumptions aren’t true. And, you know, so
there are people who have criticized
Sections 20 and 201 as being inconsistent
with the objective theory. And my argument is they’re
not really inconsistent at all if you understand the
objective theory as essentially a fault based presumption
that can be overcome in certain kinds of
situations, if someone did know that the
other person meant x, and then they figured,
oh, well, I sort of sneak around that, and ignore
that, and go on my merry way. So, yeah, and if you don’t
want to call that fault, OK. All I’m saying is that
there is some kind of fault component built into
it, and I think it’s useful– AUDIENCE: But you’re
using the word fault. That’s what I don’t– if you don’t want to use
the word fault, that’s OK. I’m saying we can talk
about all these things without getting moral
[INAUDIBLE] or anything else. We’re simply coming up
with sensible, off-the-rack interpretations that have some
standard-like characteristics [INAUDIBLE]. GEORGE COHEN: Right. So what I think I’m
saying is that you are trying to, in doing that,
both encourage and discourage certain kinds of behaviors. And that, to me– AUDIENCE: But that’s
what we always do. Right? GEORGE COHEN: Yes. Well, I think– but I think– I think there’s a
difference between that and having sort of approaches
that basically don’t focus on, exactly, was this
good or bad behavior, but, you know, was there a
promise, was there a breach, and that’s the end of it. I’m just trying to make
it a little bit more– or argue that it’s a
little bit more complicated than just that. AUDIENCE: Well, let me
extend Douglas’s point in the form of a friendly
suggestion about future work. You’ve established,
not just in this paper, but in earlier articles,
that there are these pockets of fault in contract law. And in some sense, I
certainly agree with that. And it’s a very useful
thing to have show. But as this conference
has also shown, fault can be used in all
kinds of different ways. There’s moral notions
of fault, there’s economic notions
of fault, there’s different economic notions
of fault. There’s [INAUDIBLE] formula type fault or Richard’s
ordinary care type fault, lots of others. So it seems to me that the
next project on your agenda ought to be having identified
these various pockets of fault, go back now and identify
which kind of fault is involved in each
of those pockets. Some of them we
may end up saying aren’t fault under any
of the definitions. And maybe we should
take those pockets off. I think we’ve got enough
definitions of fault out there that
probably they’re all going to be fault under
one definition or another. But that’s sort of the
problem, that until we get down to the next level of
saying, well, this is fault in the following
sense, and this pocket over here is fault in this
specific sense, I think would really the
way to carry this forward. AUDIENCE: By the way, Bill
Eisenberg, in his paper that he contributed to the
volume [INAUDIBLE] not here, literally have tried
to take on himself. AUDIENCE: Is there a
way we can get that? It’s not linked on
the conference page. AUDIENCE: Sure. Of course. GEORGE COHEN: Yeah, I
think that’s certainly a fair suggestion. The only thing that I
would just sort of add is that I think that
it is useful to be clear about what exactly
you’re talking about again. So I take that suggestion
and that criticism. I also think, though, that
it’s possible to– as I think was suggested
yesterday and discussed in your paper– it is
possible to walk and chew gum at the same time. It’s possible to have– it’s possible to have different
kinds of fault going on. You know, it’s not an
legitimate move to say, well, you know,
this could be fault under a number of
different scenarios. And, you know, in
fact, the more ways in which something could
be characterized as faulty, that the stronger
the case that there is something wrong dependent
on the [INAUDIBLE]. So I think there is some
usefulness in there, despite what Richard
said about overlap. I think, at least in
this case, overlap might make the case
stronger in some cases. But I take the point
that in general it is useful I think to be clear. Sol. AUDIENCE: An observation
and a question. The observation is I
think I’d feel better about the evolving
dichotomy between fault and strict liability,
abuses of contract, if you tied in that
in our experience, that we’re [INAUDIBLE]
by insurance. And I don’t really see
that in any of the work. Maybe that’s something that
needs to happen in the future. GEORGE COHEN: Absolutely. AUDIENCE: I mean, it
almost seems random. And that just
doesn’t sound right. You would have thought– just to make sure we’re on
the same page– you would have thought that were
pockets of fault were more dominant
because people wanted to choose whether to buy
the insurance component or not. I mean, if everybody
wanted the insurance, then it made sense, if only
on transaction clause basis, strict liability
through the contract. I don’t see any connection
between these areas and that worries
me a little bit. That’s the observation. The question is this. You think the filing is in
your favor or against you. So you know, we’re brought up
to think the strict liability of contracts. And now, you know, some of us– you have convinced some
people and other people of have convinced people that
there are pockets of fault, and that maybe you can be– first syllable it can
be penultimate or not, you know, accent or– I’m sorry. But here’s what’s going to
happen to you when you start [INAUDIBLE]. You’re then going to say, oh,
wait, I have a new discovery. There are areas are neither
strict liability nor fault. They’re like subfault. You
know, we don’t give a hoot. As long as you try,
you know, courts play around with
damages and remedies, and other things
[INAUDIBLE] areas like that. You know, you go to a private–
sign your kid up for a private school, and they say– I guess they don’t
say, we promise your kid can get into
college, or we even promise your kid can read. But they seem to be– they
must be promising something. Maybe they promise they’ll try. And then people bring these
seemingly crazy litigations. Well, you know, my
kid reads less now than before first grade. You haven’t tried at all. You– we really don’t
expect damages at air ports. You go there and you buy
your ticket to San Diego. And there’s no strict liability. And there’s no fault.
It’s [INAUDIBLE]. Even if it turns
out that the air line’s done
everything wrong, you know you’re not
getting [INAUDIBLE]. So if you start adding up
those areas of law where it’s– I don’t know what to call
it, you know, subfault. And you’re going to
say, haha, you see, this shows that I’m
even more right. Contracts is not
strict liability. It’s other things. Or are you going to
start feeling this shows that I’m wrong, because it’s
not exactly that it’s fault. It’s not fault that’s growing. It’s like there are a lot
of sort of things out there. GEORGE COHEN: OK, well,
that’s a good question. I think law is always fighting
the last war, to some degree. That is, you know,
you’re always responding to sort of what’s the
problem of the day, and what have the
existing rules wrought in terms of what people’s
incentives are now. And so, you know, I
think that there’s always going to be some room
for sort of, you know, smacking down the excesses of
whatever the previous theories or underlying principles were. So that’s just my view
of how law develops. So it’s not surprising that
maybe you have people now– some people like
Bob Scott arguing for more strict liability
because he thinks that there were too many excesses
in the former, you know, or Llewellyn world of
contextualism or something like that. So, we’re saying, look, look, we
went too far in that direction. So, then, you know, if Bob
Scott’s view prevails, then 50 from now, there’ll be
another Llewellyn who says that was wrong. So, you know, I think
these things are– it’s not so much
cyclical as, you know, whatever view that
prevails, you’re going to wind up with excesses,
perhaps, in that direction. And then there’s going
to be severe backlash in the other direction. So– and I think that there
are some areas where norms are, you know, evolving. We’re still in a relatively
new area in the air lines, about how people
still are pissed off at things that the
air lines, and you know, I think, over time we may
get better understandings about how, you know, how we want to
resolve those things, and what, you know, what the appropriate
responses should be. So I don’t have definitive
answers right now, from one day to the
other, but that’s my general answer, that
I think that we’re always going to be responding to
the prior risk behavior, whether it’s theoretical or not. The insurance point is
sort of an interesting one because something else
that no one, I think, has talked about
on the conference– I mean, we talked about it
outside the conference, but– is I think a really
interesting phenomenon for the whole conference, and
that is the bailout situation. And I think insurance
is very prominent there. You know, so in my
view about insurance, you know, one of the interesting
things with insurance is that, for lots of
different areas, I mean, breach of contract
technically was not insurable. Not insurable– insurance
companies don’t tend to do it. I mean, they insure
business interruption and different
aspects of contract. But just the
contract itself tend not to be things that insurance
companies get involved in. And I think for traditional
reasons of moral hazard, it’s hard to figure out
what these things are. But this is very important
for the bail out, because of the credit
derivatives forms, which, you know, people talk
about as insurance marketing. And what happened with the
credit derivative swaps? Well, you know, there’s
two important aspects to me that are different between
creditor and the swaps and other insurance. These are the, you
know, the bond, the insurance on the
derivatives and the mortgage backed securities. Right? So one is that you
can overinsure. Right? There’s no limit, you know. It’s like having a house
that’s worth $100,000 and you insure it
for $1 million. We don’t let you do that
in regular insurance, but in the credit
derivative swaps, you can. And then you don’t have to have
an insurable interest either, right? You don’t have to
have any property interest in the security. So it’s basically
purely vetting, which is not exactly
purely vetting because there are
people who can influence the likelihood of the risk
happening one way or the other. And that’s, you know, it’s
not the full explanation of what went wrong, but it’s
certainly something else. So I think, you know,
thinking about the insurance is exactly one of
the right questions that we should be asking. AUDIENCE: And I think
we are out of time. Thank you very much.


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