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Monday, January 30, 2012

"Cultivating Conscience" for Contracts


One of the biggest questions for me coming out of "Cultivating Conscience" is whether or not legal scholars can adapt the existing law & economics "utility-maximizing" framework to our new understandings of human behavior.  Jolls, Sunstein & Thaler imported the psychological work on heuritics and biases into the existing L&E framework through the nomenclature of "behavioral law and economics."  They sought to adapt, rather than replace.  But it seems to me that other strains of law & psychology research, such as the scholarship on procedural justice by Tom Tyler and others, call the entire framework into question.  If we are actually motivated by fairness, rather than utility, can we just label the taste for fairness as a type of utility?  Or do we have start over?

Stout states in her conclusion: "It would be a grave mistake to put down this book thinking . . . that the homo economicus model should not be taught in our schools and universities . . . . Rather, the message is that the homo economicus model is not the only model of of human behavior that should be taught."  (P. 252).  This statement seems at first a conciliatory gesture -- a recognition of the value of the law & economics framework.  At the same time, however, I think it is a rather audacious move, because it heralds the creation of another model of human behavior.  What is this other model?  Is there only one, or more?  Stout gets us started by focusing on the role of conscience in our behavior and demanding that conscience get accorded its proper role.  But if we are truly creating a new paradigm, much work remains to be done.

Of course, the immediate L&E move is to incorporate conscience -- or, perhaps, a utilitarian taste for fairness -- into the existing L&E model.  And so we see this in the realm of contract.  Stout's chapter on contract law focuses on incomplete contracts and the role that conscience plays in filling out their terms.  As Stout acknowledges throughout her chapter, there has been a lot of economics/law & economics research about how to avoid opportunism in incomplete contracts.  Stout suggests a greater role for conscience in these contracts by prompting contractual partners to reveal their prosocial preferences ahead of time, making room for prosocial behavior in courts' enforcement of these contracts, and even giving"spite" its due.

It is not clear, however, whether Stout's reforms fall outside the traditional L&E model.  Consider, for example, Judge Posner's law and economics defense of a rather robust version of contractual good faith in Market Street Associates Ltd. Partnership v. Frey, 941 F.2d 588, 593-95 (7th Cir. 1991):

So we must consider the meaning of the contract duty of “good faith.” . . . The duty of honesty, of good faith even expansively conceived, is not a duty of candor. . . . But it is one thing to say that you can exploit your superior knowledge of the market . . . . It is another thing to say that you can take deliberate advantage of an oversight by your contract partner concerning his rights under the contract. Such taking advantage is not the exploitation of superior knowledge or the avoidance of unbargained-for expense; it is sharp dealing.

. . .[C]onduct that might not rise to the level of fraud may nonetheless violate the duty of good faith in dealing with one's contractual partners and thereby give rise to a remedy under contract law. . . .This duty is, as it were, halfway between a fiduciary duty (the duty of utmost good faith) and the duty merely to refrain from active fraud. Despite its moralistic overtones it is no more the injection of moral principles into contract law than the fiduciary concept itself is. It would be quixotic as well as presumptuous for judges to undertake through contract law to raise the ethical standards of the nation's business people. The concept of the duty of good faith like the concept of fiduciary duty is a stab at approximating the terms the parties would have negotiated had they foreseen the circumstances that have given rise to their dispute. The parties want to minimize the costs of performance. To the extent that a doctrine of good faith designed to do this by reducing defensive expenditures is a reasonable measure to this end, interpolating it into the contract advances the parties' joint goal.

 The contractual duty of good faith is thus not some newfangled bit of welfare-state paternalism or (pace Duncan Kennedy, “Form and Substance in Private Law Adjudication,” 89 Harv. L. Rev. 1685, 1721 (1976)) the sediment of an altruistic strain in contract law . . . .

Market Street Associates Ltd. Partnership v. Frey, 941 F.2d 588, 593-95 (7th Cir. 1991).  Judge Posner's defense of good faith might seem less remarkable if his vision for it were not so strong.  But in Market Street, the Court essentially requires a contractual party (A) to inform the other party (B) about a particular contractual clause if A thinks B has forgotten about it.  Intent is key; if A knows B is taking an action that B would not take if B remembered the clause, A has an obligation to tell B.  If A doesn't know, then there's no obligation.

That's a rather surprising result to me, especially given that in the actual case, A is a relatively small investing group and B is a huge pension fund which should be able to take care of itself.  And it raises the question: does prosocial behavior have a role in law & economics?  I think Judge Posner would certainly think so, and he would justify it as what the parties would have negotiated for, had they had the foresight/ability to do so.  If that's the case, then maybe "Cultivating Conscience" will simply fill out our existing understandings of the rational actor, rather than challenging that framework itself.  But then how far can homo economicus take us, if he ultimately has a conscience?

Posted by Matt Bodie on January 30, 2012 at 10:10 PM in Books | Permalink


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