Contracts - only with consent.

• Author: Mann, Ronald J.
• Position: Response to article by Omri Ben-Shahar in this issue, p. 1829

My friend and former colleague Omri Ben-Shahar has established a reputation for providing nuanced and well-grounded applications of economic analysis to important problems of contract law. In recent years, he has undertaken the ambitious task of exploring a significant topic at the boundary of contract law: liability for problems that arise out of efforts to form a contract. The essay to which I reply, Contracts Without Consent: Exploring a New Basis for Contractual Liability, (1) is his second work on that topic, following his 2001 article with Lucian Bebchuk entitled Precontractual Reliance. (2) Collectively, these pieces provide a comprehensive analysis of the relationship between opportunistic behavior and contract law.

My goal in this reply is not to challenge that analysis directly, but rather, to test its boundaries. As a thematic matter, I discuss the practical domain in which the proposed new basis for contractual liability is useful and examine the plausibility of the doctrinal solutions that Ben-Shahar recommends. I first address the propriety of using a single regime to resolve preconsensual and postconsensual problems. I then consider whether the characterization of Ben-Shahar's proposal as a default rule responds to the concerns that I raise in the first part of my discussion.

1. TWO REGIMES

   The most elegant aspect of Ben-Shahar's essay is its use of a single model to resolve problems arising along a continuum, starting at the point when parties begin to consider a transaction and running through to the period after they have come to a formal agreement. (3) Although that unified model is provocative, I do not think Ben-Shahar has made a case for it. On the contrary, however passe it might seem to provide a defense of a long-standing doctrinal framework, I argue that the existing framework reflects real and important functional distinctions that Ben-Shahar's proposed framework cannot readily accommodate.

   The proposed regime rests on a considered rejection of the significance of any specific moment at which negotiating parties intentionally and consciously agree to be bound by a contract. Thus, in this regime, the date of the closing ritual is of no special importance. (4) Specifically, this regime would discard aspects of the existing framework that provide a discontinuous shift from one liability regime before that moment of closing (principally tort-based liability for bad faith negotiation) (5) to a different liability regime after that moment (expectation damages for breach of contract). (6) In their place, a no-retraction regime would substitute a gradual and continuous increase of liability throughout the preconsensual period, (7) culminating in full expectation damages at the point of the contract. (8)

   Before beginning an affirmative critique, it seems important to note a threshold ambiguity in the difference between the proposed regime and the existing law. The existing law already permits the recovery of reliance damages in circumstances that do not involve a bargain, specifically, where the party that seeks to recover reliance damages can show that it acted reasonably in expending money based on the actions of the other party. (9) Thus, if a financing partner tells a developer that it should proceed to break ground on a building on the assumption that the parties will be able to work out the details of a financing arrangement, the developer has a good case for reliance damages against the financer, even in the absence of a contract that would permit expectation damages. (10)

   Although the no-retraction regime is plainly different, the extent of the difference is not entirely clear. If Ben-Shahar contends that parties should be liable for expenditures made by potential contract partners only after they make serious proposals, he is saying something not substantially different from what already exists in the current law. The current law would permit such damages if, considering the circumstances, the expending party reasonably could treat the proposal as a license to spend money. That legal remedy usually arises where one party (based on conduct of the other) justifiably relies on the fact that a contract is forthcoming. (11) Ben-Shahar's proposal provides a remedy at an earlier stage (before the parties reach a point when it is fair to assume that a contract is forthcoming). Ben-Shahar's discussion, however, says little about how to determine which communications create liability. His model takes as a given that "serious" communications will induce an appropriate measure of reliance and that all other communications will be ignored. (12) That model, however, simply assumes away the problem--which largely occupies the existing doctrine--of determining what types of promises are sufficiently serious to warrant reliance on the part of the recipient. (13)

   However, that narrower understanding of Ben-Shahar's proposal is inconsistent with his emphasis on a slow and gradual development of liability based on the gradual juxtaposition of negotiating positions. (14) Reliance damages, as typically contemplated, have the same type of all-or-nothing switch that expectation damages under consent-based liability rules do. Thus, although a party can recover nothing expended before it is reasonable for that party to rely, it can recover everything that is reasonably expended after it is reasonable to rely. (15) Ben-Shahar's proposal, in contrast, seems to contemplate a sort of quasi-expectation liability regime, in which each party is always liable for the expectation of the other party for those points on which the first party has offered a position. As the comprehensiveness of the position increases, the potential liability increases. As the juxtaposition increases, the real-world likelihood that the proposal would be enforced increases.

   That precisely reticulated increase in liability is substantially different from the current law. I do not think, however, that it works out in practice quite as simply as Ben-Shahar's presentation suggests. It is not clear, for example, how he would match a slow increase in the number of agreed-upon issues to a slow increase in monetary liability. He assumes that a court practicably could enforce a gradual increase in liability at any stage through a combination of (a) the then-agreed-upon terms and (b) the least favorable terms on all other subjects. As the ratio of agreed-upon terms to least favorable terms increased through the course of negotiations, the recoverable amount would increase. Whether such a complicated proposition can be implemented by courts is a threshold question about the proposal.

   Putting those threshold questions aside, the principal purpose of my response is to consider the propriety of Ben-Shahar's unified framework. Ultimately, my response to the proposal is the standard move one would expect from a scholar of a particularizing tendency like myself: This framework fails to pay due regard to the considerations that affect parties on either side of the traditional line at which the parties agree to be bound.

   1. Before Consent

      The central contribution of Ben-Shahar's project is its treatment of the period before consent. Because the project focuses on opportunism, he uses a model in which negotiation is a process of dividing the surplus that the contract would create. (16) Within that model, any retreat from a negotiating position plausibly is viewed as an opportunistic effort to capture an inappropriate share of the surplus. To enable those negotiating positions to generate more credibility, and thus more effectiveness at inducing reliance, (17) the proposed regime would impose liability on those who "retract" serious negotiating proposals. (18) That conclusion rests on his analysis (here and in his work with Bebchuk) (19) of the benefits that will arise from enhancing the ability of the promisee to adapt her behavior in response to a credible promise.

      The obvious question is whether such an analysis gives due weight to the costs of promising that inevitably arise when promises are made subject to greater legal sanction. (20) Ben-Shahar, of course, recognizes this possibility. Indeed, Ben-Shahar notes that his proposal will "weaken[]" parties' "'freedom from contract.'" (21) He argues that this weakening is not a significant problem because "parties that place great value on this freedom can choose to opt out of the liability consequences and opt into the consensus regime." (22) I have three general responses to that line of reasoning: (1) Ben-Shahar overestimates the importance of opportunism in the preconsensual period and understates the importance of risk assessment; (2) Ben-Shahar underestimates the adverse effects of enforcing nonreciprocal promises; and (3) in practice, parties can make their negotiating commitments credible without this regime.

      1. How Important Is Opportunism?

         I was asked to contribute a Commentary with both empirical and doctrinal emphases as a counterpart to the philosophical and analytical emphases to be expected from the other commentators. It is, of course, not practical to conduct any substantial empirical investigation of the relevant questions in the brief space of this Commentary. Still, some useful empirical intuitions may shed light on the matter.

         Ben-Shahar's analysis focuses on opportunism. The benefits of that approach, as I mentioned above, are significant. It gives us a keen understanding of the effects of existing and possible legal regimes on the potential for opportunistic behavior in preconsensual negotiations. The difficulty is in moving from that laboratory-like understanding of opportunism to a richer world of contracting in which opportunism is not the only--or even the dominant--factor that affects negotiations.

         At its heart, Ben-Shahar's work implicitly seems to use as its paradigm a contract for the sale of simple assets (such as commodities), in which price and timing are the main...