Contracts without consent: exploring a new basis for contractual liability.

• Author: Ben-Shahar, Omri

This Essay explores an alternative to one of the pillars of contract law, that obligations arise only when there is "mutual assent"--when the parties reach consensus over the terms of the transaction. It explores a principle of "no-retraction, " under which each party is obligated to terms it manifested and can retract only with some liability. In contrast to the all-or-nothing nature of the mutual assent regime, where preliminary forms of consent are either full-blown contracts or create no obligation, under the no-retraction regime, obligations emerge gradually, as the positions of the negotiating parties draw closer. Further, the no-retraction liability regime can be coupled with different damage measures to advance various social goals, including optimal reliance. The theory is applied to areas of contract formation that have produced inconsistent jurisprudence, such as precontractual liability and misunderstandings, and resolves them in a simple and unified fashion. Finally, the analysis provides a fresh understanding of the obligation to negotiate in good faith and explores a new criterion for gap-filling in incomplete con tracts.

INTRODUCTION

One of the pillars of the law of contract formation is the principle of mutual assent. According to this principle, a contract forms only when the positions of the two parties meet. When the parties represent different conceptions of the terms under which they intend to deal, no contractual liability arises, and both are free to walk away.

Mutual assent has many implications for contract law theory and doctrine. Importantly, it sets the boundary between the precontractual and the contractual stages. Prior to attaining a consensus, while an agreement is still being negotiated, no liability arises between the parties. At some point in time, the positions of the parties (or, more correctly, their outward manifestations) meet, and full expectation liability emerges. Liability, in other words, does not accumulate continuously. Rather, it rises abruptly as soon as the "qualitative" assent test is satisfied.

This principle also implies that a contract cannot exist when the parties remain silent over some important elements of the deal. True, statutory and judicial gap-fillers have eroded this traditional common law approach. Nevertheless, in important areas of the transaction, an absence of affirmative assent to terms still implies a non-contract.

Many of the rules characterizing the legal consequences of the communications at the contract formation stage are also corollaries of the mutual assent principle. For example, a communication is an offer--such that it can be accepted unilaterally--only if it is definite; a response to an offer that does not manifest assent--that changes some of the terms--is deemed a rejection and terminates the power of the offeree to unilaterally conclude a deal; and an offer is revocable at any time prior to its affirmative acceptance.

This Essay suggests that the consensus principle embodied in the mutual assent doctrine might not be a desirable instrument to advance the goals of potential transactors. It argues that limiting contractual liability to cases in which a consensus was manifested fails to reflect the different "tones" of the "understandings" and commitments that parties may express throughout the negotiations. As a result of this failure, the basis for contractual liability, in some situations, may be too narrow to induce optimal reliance by the parties.

As an alternative to the consensus-or-nothing structure, this Essay explores a no-retraction principle. The basic insight is the following: A party who manifests a willingness to enter into a contract at given terms should not be able to freely retract from her 'manifestation. The opposing party, even if he did not manifest assent, and unless he rejected the terms, acquires an option to bind his counterpart to her representation or charge her with some liability in case she retracts.

In contrast to the mutual assent approach, the no-retraction principle developed here suggests that when two parties attach different, but equally plausible, meanings to their agreed-upon contractual obligation, the absence of consensus would not negate any liability. Instead, under the no-retraction principle, each party should have a right to enforce a contractual obligation according to the meaning intended by the other. Further, even when the parties have not reached a full-blown agreement or an understanding over terms, as in the case where both parties make serious, but nonconforming, precontractual representations of the proposed terms, the legal consequence should not be mutual rejection accompanied by the freedom to walk away. Rather, the representations of the parties give rise to bilateral options: each party can bind (with the magnitude of liability to be specified below) the other to the terms that party proposed. If the proposal is incomplete and gaps need to be filled, they will be filled with terms most favorable (within reason) to the proposing party. Thus, while a party is unable to retract, it is only from a deal that includes terms she proposed, supplemented by terms most favorable to her. I will argue that the enforced-against party has no reasonable grounds to reject a deal containing such terms.

Another way to conceptualize this idea is to view liability as a process of continuous convergence. Initially, when the consensus is "thin"--when the two parties differ on many terms of the deal--the option that each party acquires (to enter a deal that is very different from what she proposes and very favorable to the other party) is of minimal burden to the other party. As negotiations move forward and consensus grows, the option that each party acquires becomes more valuable. It is an option to enforce a deal that includes all the terms agreed upon, supplemented with the terms proposed by the other party. Finally, when the two parties reach a full agreement, i.e., mutual assent, the value of this option is identical to the value of the contract. Thus, in effect, the greater the "fraction" of a contract the parties have, the greater the "fraction" of contract liability the plaintiff can enforce.

The no-retraction principle provides a new underpinning for Lon Fuller's famous notion of "an ascending scale of enforceability." (1) Fuller argued that weaker measures of damages--restitution and reliance damages--should be available when the grounds for enforcement are weaker. Liability for retraction satisfies Fuller's ascending scale notion, since it correlates the magnitude of liability with the degree of consensus. It differs, however, in important ways from Fuller's scale, which was limited to three discrete steps of damages and which lacked a criterion for when "enforceability" should be weaker. Liability under the no-retraction regime is continuous, with the continuity achieved not by switching among damage measures, but by affecting the terms of the deal that the plaintiff can enforce. It provides an operative measure for scaling enforcement that tracks the degree of consensus: the closer the parties' positions have come, the more severe the liability consequence.

The no-retraction principle may seem a strange basis for liability in a system that is so fundamentally attached to the consensus/ agreement principle. Precisely because it seems sufficiently strange to contract scholars and practitioners, such an alternative perspective is not commonly recognized. But the conception of contractual liability arising from a one-sided promise, rather than a two-sided consensus, is not so foreign to historians of the common law. Prior to the nineteenth-century emergence of the consensus ad idem theory of contract, liability was implemented through the action of assumpsit--the wrong of breaching a promissory obligation created by one party. It is only in more recent times that contractual liability merged with the notion of consensus. (2)

Further, the divorce of obligation from consensus/unanimity and its grounding instead on a principle of "rejectability"--on whether it is reasonable to reject a bargain--is a familiar idea in moral philosophy. (3) It is recognized that the notion of consensus as the moral justification for obligation is narrower than the notion of what is unreasonable to reject. (4) Accordingly, the no-retraction principle provides a specific conception of non-rejectability. It is also consistent with extra-legal "no-going-back" norms in negotiations, which, for example, informally sanction a party who responds to the other party's concessions by toughening, rather than softening, her own proposals. (5) In this Essay, I will not explore in any depth these historical, philosophical, or sociological aspects. They are mentioned here in passing to suggest that the consensus principle of contract formation--being such a fundamental part of our modern legal and economic heritage--is not the only sensible basis for liability and to propose that an alternative no-retraction basis is at least possible. (6)

In fact, if one looks carefully enough, it is easy to find numerous instances within existing doctrine in which contractual liability is founded not on consent, but on a variant of the no-retraction approach. For example, there are circumstances in which offerors cannot retract their offers either because they chose to make "firm offers" or because the law imposes an irrevocability principle. Here, offerors are legally bound even before acceptance. (7) Similarly, where the agreement leaves a term to be further negotiated, courts might forbid a party to reject a proposal made by the other party that is very favorable to the rejecting party. (8) In rationalizing these and related "intermediate liability" doctrines, the courts explicitly invoked the justifications underlying the no-retraction principle. Accordingly, the no-retraction regime can be viewed not as a...