NONPARTY INTERESTS IN CONTRACT LAW.

• Author: Ben-Shahar, Omri

INTRODUCTION 1096 I. THE PARTY PRIMACY NORM 1100 A. What Is the Party Primacy Norm? 1100 B. Justifying the Party Primacy Norm 1102 1. Institutional Competence 1102 2. Opting Out of Nonparty Defaults 1106 C. Some Traditional Limits to the Party Primacy Norm 1109 1. Mandatory Guardrails 1109 2. Parties Like These 1113 3. Third-Party Beneficiaries 1116 II. NONPARTY DEFAULTS 1116 A. Nonparty Interests as a Canon of Interpretation 1117 B. Interpretation of Insurance Contracts 1121 1. Victims of Auto Accidents 1123 2. Mass Torts 1124 3. Environmental Harm 1126 4. Intentional Harm 1128 C. Remedies 1130 1. Environmental Harm 1131 2. Economic Vitality 1132 3. Interest of Consumers in the Chain of Distribution 1135 4. Social Interests Warranted in the Contract 1136 D. Excuse Doctrines 1138 III. IN (PARTIAL) DEFENSE OF NONPARTY DEFAULTS 1139 A. Institutional Division of Labor 1139 B. Will Nonparty Defaults "Stick"? 1143 C. The Advantage of Default Rules in Advancing Nonparty Interests 1147 CONCLUSION 1148 INTRODUCTION

Contract law is defined by one overarching goal: to advance the contracting parties' legitimate interests. (1) Courts generally enforce the agreements parties choose to enter and the promises they wish to make, providing them the power to form relationships and "effect changes" in their affairs. (2) Unlike other types of private law rights and obligations, like torts, property, or restitution, contract law often allows parties to ignore the interests of third parties, the community, or the government.

Contract law's focus on the parties' interests extends beyond its permissiveness towards the substance of contracts and into the rules and doctrines that govern contract supplementation by courts. The cardinal rule of contract interpretation and enforcement is that judges should seek to identify the parties' intent. When intent is ambiguous, judges might turn to a party-centric backstop--the underlying interests of the parties, their backgrounds, and objectives--to figure out what their intent might be. (3)

This loyalty of contract law to the interests and plans of the contracting parties--what we call the "party primacy norm"--is so tautologically part of the contract law that it is rarely challenged. (4) Indeed, historical and present-day contract law debates tend to focus on competing and evolving conceptions of the party primacy norm: how to identify and interpret the parties' intent, how to construct and supplement it, and how to grant the parties' interests adequate protection. (5)

Of course, parties' freedom to advance their joint goals is cabined by nonparties' legally protected interests. These limits to the party primacy norm, however, are usually transplants from statutes and principles originating in other areas of the law. (6) Criminal law instructs contract law not to enforce conspiracies, even though they are clearly in the parties' interests; zoning laws limit the type of leases landlords and tenants may enter; and competition law sets limits on mergers and collusive agreements. Through the concept of agreements against public policy, judges evaluating contracts import the regulatory mandates of other bodies of law.

This Article is organized around the observation that the party primacy norm has more exceptions than these familiar mandatory guardrails. We call these exceptions nonparty defaults. These are doctrines of contract through which courts construct and shape the scope of contractual obligations to advance nonparties' interests and do so without direct command from other areas of law and with full permission for the parties to opt out. We show that these nonparty defaults are both abundant and durable.

A court's choice of whether to grant the specific performance remedy for breach provides a good example. Typically, it depends on how well the aggrieved party's interest can be protected by monetary damages. Specific performance becomes the primary remedy when damages are inadequate. (7) But in several leading cases, courts have stepped beyond this narrow exception and considered the interests of nonparties in the performance of the contract in shaping the remedy. For example, in a landmark case, a Delaware court ordered the specific performance of a merger agreement in order to protect the interests of workers and communities, noting that "[t]he impact of a forced merger on constituencies beyond the stockholders and top managers of [the companies] weighs heavily." (8)

In a rich array of other contexts, courts also take nonparty interests into account. Insurance contracts provide striking examples. Whether to serve interests of auto accident victims, a clean environment, or victims of mass torts, all of whom are nonparties to the insuring agreement, courts interpret and construe the language of liability insurance policies broadly. (9) While policyholders with deep pockets might benefit from such pro-coverage interpretation, the main benefits accrue to victims and to diffuse social interests. It is the desire to promote these nonparty interests that courts expressly invoke as their canon of interpretation.

This Article has two primary purposes. The first is to demonstrate the prevalence of nonparty defaults, and the second is to explain and to partially justify their existence. To do so, this Article proceeds in three parts. Part I sets the stage. It provides a (very brief) statement of the party primacy norm, its justifications, and its common exceptions. It shows that existing exceptions to the party primacy norm are mandatory rules transplanted from other substantive areas of the law. Part II--the heart of the Article--reveals the rich world of nonparty defaults. It shows how judges use (or debate the justification for) default rules, interpretation norms, and remedial principles that advance a variety of nonparty interests.

In Part III, this Article turns to its second purpose: examining the justifications for nonparty defaults. To do so, we address two primary concerns. The first is a normative question: are common law courts adjudicating contract disputes based on records developed by the parties the best institution to promote societal interests? We argue that, in using nonparty defaults, courts could potentially serve as a useful supplement to legislation in looking out for broader social good. The second is a feasibility concern: are nonparty defaults worth the candle, given the parties' ability to contract around them? We show that even though nonparty defaults could be disclaimed, many stick--for a number of reasons. We finally introduce a new way of thinking about the utility of nonmandatory rules--as "first response" aids when new and anticipated social problems and emergencies pop up.

This Article is not the first to recognize the role of nonparty interests in contract law. (10) But most limits on contracting come from other areas of law--such as bankruptcy, securities, and employment law. Very little attention has been paid to nonparty interests within contract law, and even less to their protection via nonmandatory rules. Recognizing that nonparty defaults have been shaping contract interpretation and construction, court-designed gap-fillers, and remedies opens a new lens into the social role of contract law. This Article's goal is thus to describe an ongoing phenomenon and understand it--not as a collection of wrongheaded decisions, but as justified and durable common law.

1. THE PARTY PRIMACY NORM

   1. What Is the Party Primacy Norm?

      Contract law enforces promises for many good reasons: to protect expectation and reliance interests of promisees, (11) to enhance the autonomy and freedom of promisors by granting them the power to engage with others and promote their own plans, (12) to do justice between parties in a reciprocal relationship who disagree over their respective claims, (13) and of course to increase the welfare of the parties. (14) But whether one focuses on efficiency or justice, autonomy or reciprocity, reliance or expectation, or ex post versus ex ante concerns, common justifications for the existing rules often circle back to the interests and positions of the parties in the transaction. This is the party primacy norm.

      Contract law helps the parties, not outsiders, achieve cooperation. It protects the interests, plans, and wellbeing of the parties, not of others. When it operates to remove ambiguity over the terms of the contract--for example, by interpreting and constructing the terms or providing gap-fillers--contract law looks at the imputed goals, the implied intent, and the past conduct of the parties as the guiding criterion. Even the exceptions--like the third-party beneficiaries doctrine--are justified because the parties themselves so designated them. (At this point, we'll stop italicizing parties, but feel free to read with that emphasis in mind.)

      To be sure, contract law is a machinery run by the collective, and it is therefore constrained not to offend collective interests. Agreements the parties make and jointly favor may not be serviced by contract law when they harm society or unduly burden courts. The party primacy norm therefore is restrained by substantive boundaries from numerous other areas of law, primarily public law, and also through some internal mandatory guardrails.

      One of the primary illustrations of the party primacy norm is the contract interpretation doctrine. "[T]he primary purpose and function of the court in interpreting a contract is to ascertain and give effect to the parties' intention," says Williston, because "the cardinal principle of contract interpretation is that the intention of the parties must prevail." (15) On this matter, even his contrarian, Corbin, easily concurs. (16) The field of contract law has long debated how exactly to find the parties' intent, how much extrinsic evidence to bring to bear in this inquiry, and whether to trim intent's sails by using objective measures (as in--what might a...