Contract Theory


The Persistence of “Dumb Contracts” (working paper)

“Smart contracts” are a hot topic. Presently, smart contracts mostly consist as evidence of property, like crypto-currencies or mortgages, created and/or transferred on blockchain technology. This is an exploration of the theoretical possibilities of artificial intelligence in a far broader range of complex and heretofore negotiated transactions that occur over time. My goal is to understand what it means to make a contract smarter, i.e. to delegate more and more of the creation, performance, and disposition of legally binding transactions to machine thinking. Moreover, I want to do so from the perspective of one who is neither a true believer in the purported technological singularity to come nor a digital Luddite.

There are two primary themes. First, the extent to which complex transactions occurring over time can be embodied in computer programs – the ability of the contracts to be smarter rather than dumber – depends on the extent to which the subject of the transaction becomes not just a social fact, but an institutional reality. The dumb contract is merely a map of an antecedent reality, but the smart one is a real thing in itself. Second, smart rather than dumb contracts will require the translation of often fuzzy legal predicates, otherwise capable of expression in truth-functional logic, into digital proxies expressible in the non-ambiguous discrete units of code. The upshot of these two themes is that, at least until there is some better evidence that a technological singularity will occur, deciding will remain something that is fundamentally different than reasoning by way of logic or code. Hence, for the time being, dumb contracts, ones that leave open the possibility of what Karl Llewellyn called situation sense, will persist.

Conversation, Convention, or Conversion? A Response to Kar and Radin (working paper)

This is a response to “Pseudo-Contract and Shared Meaning Analysis” by Professors Robin Bradley Kar and Margaret Radin. Their article is a thoughtful and ambitious attempt to find a principled basis in the theory of contract formation for distinguishing what they see as the legitimate portion of the transaction – the “actual agreement” which is “cooperatively communicated” – from that which ought not to be enforced (usually the extensive unread boilerplate or click-through terms). While I am sympathetic to the policy aim, I resist the core of their thesis, which is that there is a discernible “actual agreement” arising from a “shared meaning” that is neither merely the objective manifestations of an agreement nor the individual subjective intentions of the parties. My resistance to the thesis falls into three categories: (a) that the authors have transformed Paul Grice’s conversational maxims from an “is” of description into a normative “ought;” (b) that the thesis is simply a more sophisticated version of a particular conception within contract theory, the problematic “meeting of the minds” metaphor; and (c) that shared meaning is either (i) nothing more than normative “oughts” of linguistic cooperation, no less arbitrary and unpredictable in their application than the unconscionability standards, or (ii) an ontological and epistemological claim that appeals not to rational persuasion but to conversion. As a result, I caution against rushing into shared meaning analysis as a broader basis for understanding contract formation or interpretation.

Lexical Opportunism and the Limits of Contract Theory, 84 U. Cinn. L. Rev. 217 (2016)

This essay is a reflection on the gap between the real-life practice of contract law and some of the academic theory that tries to explain it. I define “lexical opportunism” as an adversary’s clever lawyering, using contractual text of a complex business arrangement, ironically as devoid of thoughtful drafting or close negotiation as the boilerplate in a consumer contract, but which, when turned into a legal theory, creates a potential for staggering liability beyond all common sense. A multi-billion lawsuit, recently settled, serves as an example, and triggers my discussion of (a) what it means to engage in theoretical assessment in contract law, (b) how the justification of contract law by way of inhibiting economic opportunism is based on the simplest examples, rather than the kind of contract discourse found in any real-world contract worth spending millions to litigate, and (c) how normative theory based on upholding the moral sanctity of promise keeping evaporates when the parties disagree about the meaning of their promises. I argue that both economic and moral theories about contract law fail to account for issues in the use of language and depend on the naïve adoption of the correspondence theory of truth. The nature of language permits opportunism, and the only check on it is the desire, from whatever motivation, not to be opportunistic. I conclude with what I hope are some constructive thoughts about the appropriate use of theory in lawyering, and thereby mitigate my skepticism whether any single theory or discipline is capable of meaningful explanation or prediction about lexical opportunism.

Cognition and Reason: Rethinking Kelsen in the Context of Contract and Business Law (2016)

This is a contribution to this book on the influence (or lack thereof) of the great Austrian jurisprudential theorist, Hans Kelsen.  The abstract of my paper:

This is a reconsideration of Hans Kelsen’s Pure Theory of Law from the standpoint of a long-time business lawyer, contract theoretician, and Kant-influenced epistemologist. The essay (a) reconsiders the Pure Theory in the context of contract and business law (i) in light of how legal reasoning operates (something the Pure Theory accurately characterizes) in contract and business law (as, for example, in the classic consideration/promissory estoppel case, Allegheny College), and (ii) with a more faithful or more satisfying account than Kelsen provided of the kind of knowledge we obtain if we are going to think of contract and business law as a kind of science, whether descriptive or normative, under Kantian conceptions of cognition and reason; and (b) considers the practical and theoretical implications of the foregoing somewhat obscure and arcane distinction, if not for the contract and business lawyers who actually do the practicing, then at least for those who teach them. Facing reality before deciding on a course of action is often the hardest task for lawyers and their clients. I am thus skeptical of a legal “science” that seeks an ironically and paradoxically abstract positive law of contracts, an ideally coherent doctrine that exists somewhere “out there,” removed from its application to real world experience.

Formalities, Speech Acts, and the Realities of Contract Formation (2015)

This is a contribution to Speaking of Language and Law: Conversations on the Work of Peter Tiersma, edited by Lawrence Solan, Janet Ainsworth, and Roger W. Shuy (Oxford University Press, 2015).

Contract as Meaning: An Introduction to "Contract as Promise at 30", 45 Suffolk L. Rev. 601 (2012)

This is an introductory essay to the volume of the Suffolk Law Review containing the papers from our symposium centered on Charles Fried’s iconic book, 'Contract as Promise' at 30: The Future of Contract Theory. My theme is the relation of theory to practice, particularly in contract law, and why a theoretical orientation, broadly speaking and whether or not so conceived by the practitioner herself, is fundamental to that practitioner making good judgments. Theorizing - imposing coherent and correspondent conceptual order on events in the real world - is not as unrelated to the ordinary work of lawyers (and others) as some critics of legal academy would suggest. I provide a summary of the papers, presentations, and commentary by the distinguished participating scholars, and consider how their work fits within the framework I describe. Finally, I consider the role of meaning in contract theory; in other words, how both descriptive and normative theory, whether directed to the legal institution of contract or to other phenomena, are all ways of making sense of the human condition, and thus an essential part of what practicing “lawyers-theorists” do every day.

Metaphors, Models, and Meaning in Contract Law, 116 Penn St. L. 987 (2012)

Why does there seem to be such a wide gap between the subject matter of the usual first-year contracts course and what practitioners (particularly transactional lawyers) actually experience? This article is an attempt to bridge the gap, combining insights from academic theory and real-world law practice. My claim is that the law as discipline has developed its own powerful but self-contained conceptual framework — in the coinage of one noted scholar, “an epistemic trap.” The subject matter of contract law, something that is largely the creation of private parties and not the state, requires dealing with legal truth not just as a coherent body of normative doctrine, but also correspondent in some way to the parties’ actual self-legislation. In other words, the exercise of understanding the law relating to transactions is not wholly descriptive —“to what did the parties agree? Nor is it wholly normative — “what should be done when the parties dispute the nature or terms of their agreement after the fact?” Much of the difficulty of the first-year contract law enterprise lies in this conflation of the law’s usual after-the-fact normative focus (as, say, in tort or criminal law) with an inquiry into what private law the parties actually meant to create before the fact. 

I propose escaping the epistemic trap with a turn to metaphor theory. The underlying metaphor common to prevailing conceptions of contract law, and which demands some form of correspondent truth from the contract (and contract law), is “contract as model of the transaction.” I suggest alternative metaphors of categories as containers, ideas as objects, and the transaction lifecycle as a journey. The goal is to focus on the “subjective to objective” process of the transactional lifecycle, and to consider the perspectives of the participants in or observers of that process. In particular, I consider the models and metaphors that shape the conceptual frames from within which those participants and observers perceive, make use of, and derive meaning from what end up as contracts, the objective manifestations of agreements.

Objectivity and Subjectivity in Contract Law: A Copernican Response to Professor Shiffrin, 21 Can. J. L. & Juris. 399 (2008)

This is a response to Seana Shiffrin's recent and important contribution to the continuing debate whether there is a universal moral or economic truth at the heart of contract law. Her most significant advance toward a general theory of promise and contract is not, however, her analysis of the divergence of morality and contract, but instead her identification of the critical moment at which the interposition of the public in a private matter occurs or is contemplated. This essay carries that theme forward, suggesting that a universal justification for contract law is not possible because the law, by its very nature, objectifies (publicly or with that implicit threat) what was heretofore a private relationship.

Freedom, Compulsion, Compliance and Mystery: Reflections on the Duty Not to Enforce a Promise, 3 Law, Culture & the Humanities 82 (2007)

In this essay, I suggest the difference between the law of consensual relationships (i.e., contracts) and the morality of those relationships is one of compulsion and freedom. In the former, we find ourselves being compelled by, or compliant with, a rule some distance removed from the basic norm; in the latter we find ourselves in touch, constantly and sometimes in the face of more visceral obligatory rules, with a far deeper and more fundamental (transcendental) sense of fairness. Moral decisions are the ones made without any threat of compulsion from the law. The clearest example in commercial relationship of a moral decision unfettered by the positive law is the promisee's choice not to enforce an otherwise legally binding contract. As a matter of logic, if not practice, a court cannot impose a duty to do so, either as a matter of positive law theory or natural law theory that contends law is not law unless it rests on a deep structure of values like fairness or justice or liberty. Nevertheless, that sense of obligation on the part of the promisee is regularly sensed and even acted upon in commercial relationships, and its source is the will of the autonomous agent who has not traded freedom for compulsion or compliance.

Contract Formalism, Scientism, and the M-Word: A Comment on Professor Movsesian's Under-Theorization Thesis, 35 Hofstra L. Rev. 23 (2006)

In two recent essays, Professor Mark L. Movsesian has suggested that a significant difference between the classical formalism of Williston and the formalism of contemporary contracts scholars is the extent to which the earlier work was under-theorized. I want to suggest an area in which there is a consistency to the under-theorization between the classical and the modern contract formalists: the extent to which theorization in anything that approaches metaphysics is, and has been, consistently anathema. Modern theorizing is overwhelmingly of a particular form: dispassionate social science inquiry into how we tick, rarely questioned but implicit norms shaped solely around the utilitarian, if not material, consequence of choices, all seasoned by the occasional post-modern expression of futility and desperation around the indeterminacy of moral issues. It does not address the way we might think about solving the problem outside of the formal models (whether classically or economically based) of the law. 

In a brief response to Professor Movsesian, I encourage debating over contract law not just in the context of pragmatics of instrumental reason, but as part of a broader inquiry into and struggle with the ends to which any endeavor is directed.

Duty and Consequence: A Non-Conflating Theory of Promise and Contract, 36 Cumb. L. Rev. 321 (2006).

I argue that the debate between deontologists and consequentialists of contract law conflates and therefore unduly confuses the analysis of each of them. The debate is a reprise of the philosophic debate between rationalists and empiricists. Present-day legal contract consequentialists (in the empirical tradition) see reason (pure or practical) as unhelpful or worse in telling us what we ought to do. Pragmatism and consequential analysis of default rules, if anything, dominate the discussion. But the present-day contract rationalists fare no better, seeking to make constitutive claims of knowledge on the basis of reason. The deontological concept of contract as promise may well tell us how we ought to order our private relationships, but it does not really explain why the law is as it is. 

There is irony in the overwhelming interest of the consequentialist legal academy in trying to find a scientific answer to our most fundamental questions of duty and deontologists to defend morality consequentially. I argue that there are limits to each and that we operate consequentially and deontologically in the ordering of our private affairs, often simultaneously. The mistakes (typical of reason's drive to a single maximand) are assuming, on one hand, that contractual consequentialism defines our commercial relationships, or, on the other, that contracts are capable of containing our moral obligations. Put another way, there is nothing moral about the contract (versus the underlying promise), and the conflation of the two is the source of the confusion over the limits of the law of contract. The moral or transcendental aspect of the contract is the underlying promise - its soul, so to speak - but the law can only doctor its body, what shows in the contract.

The Bewitchment of Intelligence: Language and Ex Post Illusions of Intention, 78 Temp. L. Rev. 99 (2005)

Lawyers who negotiate and litigate over complex deals have an intuitive notion of the value of what they do in connection with the contract. The arguments around technical contract language often are a lawyers' game; in most cases, what is clear would have been clear on a handshake; and what is tightly negotiated bears only a random relationship to the areas of future dispute. If they happen to have drafted tight and clear language around the particular matter in dispute, it is as much luck as foresight. Thereafter complex agreements can have binding effect for years, but most of the relationship transpires without explicit reference to the contract. The problem to which much of contract interpretation scholarship is directed arises only when there is a significant disagreement not resolvable by non-legal means. If the contract is not sufficiently clear on the subject so the parties agree on the outcome, or a court has an easy case, how do courts go about filling gaps that the parties simply did not address, or providing meaning in the present circumstance to words that do not unambiguously resolve the problem? 

I want to suggest an answer I believe is intuitive to practitioners but may be provocative in the academy. The search for an illusive ex ante mutually intended meaning is a waste of time, as is worry about the ancillary problem of opportunism. The creation of the complex contract and its later interpretation in a difficult case of ambiguity are distinct events. If a previously negotiated term that is capable of being ambiguous nevertheless has a mutually understood meaning, it will be apparent at the time of the potential dispute, but in that instance there will be no dispute and no jurisprudence. If there truly is a dispute, however, there is no going back to a mutually intended meaning as of the time the contract was made, because the words only take on meaning at the time of their application to the circumstance. It follows that opportunism is a function of extra-legal morals and norms, and is not controllable by language that turns out to be disputable, if the parties choose to dispute it. The proper focus of courts, therefore, is a pragmatic resolution of disputes, and not a search for mutual intention.

© Jeffrey Lipshaw 2013