The common sense of contract formation.

AuthorWilkinson-Ryan, Tess
PositionSymposium: Festschrift in Honor of Richard Craswell

INTRODUCTION I. THE LAW OF SUBJECTIVE ASSENT A. Subjective Interpretations of Objective Manifestations of Assent B. Promissory Estoppel C. Intent to Be Legally Bound II. THE PSYCHOLOGY OF CONTRACT FORMATION A. Negotiation and Drafting B. Contract Performance as a Function of Formation C. Formation III. EXPERIMENTAL METHOD AND RESULTS A. Study 1: Believing a Contract Exists Matters B. Study 2: What Do People Know About Contract Formation? 1. Offer and acceptance 2. Formality 3. Mailbox rule 4. Terms that follow C. Study 3: Do Parties Need to Know the Law to Make Binding Contracts? D. Study 4: Bargaining in the Shadow of Reciprocity Norms IV. DISCUSSION A. Overview of Results B. Formalism C. Spectrum of Obligation D. Consumer Contracts: The Relationship Between Subjective Assent and Self-Protection CONCLUSION INTRODUCTION

Unlike torts or civil procedure or any area of public law, the laws of promissory exchange only apply to parties who have manifested their assent to be bound. And yet, it is common sense that people sometimes feel bound to exchanges when the law would release them. Norms of promise keeping and reciprocity, interpersonal courtesy, and community reputation have real effects on contract behavior. Although it is perhaps a less exciting claim, it is also the case that the law itself (or, at least, what the parties believe the law to be) affects transactional decisionmaking and parties' commitments to their interpersonal obligations.

This Article presents four new experimental studies of commonsense approaches to contract formation in the hopes of making two primary contributions. The first is to survey intuitions about what the law of formation is. In a world in which the vast majority of contracts are signed without the advice of counsel, most people have to draw their inferences of formation based on their background knowledge and beliefs. We find that the colloquial understanding of contract law is about formalization of an agreement rather than the agreement itself, a finding with implications for how firms may be able to manipulate mismatches between legal rules and ordinary intuitions in consumer markets.

Our second contribution is to tease out the intuitive relationship between formation and obligation--to ask whether and when it matters if individuals believe a contract exists. The law of contracts is very clear that parties' obligations to one another turn entirely on whether they have mutually manifested assent to be bound. And in fact, we find that behavioral results suggest that legal (or legalistic) formation does enhance commitment to a deal irrespective of its power to impose sanctions; it seems that the law has freestanding normative force at least in this context. However, we also find that there are cases in which knowing or not knowing the legal rule is essentially irrelevant. In many scenarios, our results suggest that parties' likelihood to perform or breach is influenced by their moral and social preferences--reciprocity, altruism, and promise keeping--rather than the law of contract formation.

Contracts scholars have long debated the doctrinal and economic importance of formation, particularly when parties often invest significant resources in negotiating. (1) From a policy perspective, the subjective experience of formation is often significant because contracts act as reference points. (2) Parties treat each other, and their obligations, differently pre- and postcontract. (3) Once a contract is formed, they take fewer precautions, seeking less information about the market and about one another. (4) If an ordinary individual thinks she is in a contract with another, but the law treats them as strangers, she can be exploited by her counterparty. (5) Indeed, the converse vulnerability also exists for parties who think they are still negotiating but are in fact already legally committed.

To date, there has been almost no investigation of when individuals act like contracting parties. This Article undertakes to fill that gap in the literature by relating a series of experiments and studies regarding lay attitudes and behaviors surrounding contract formation.

We proceed as follows: Parts I and II provide context for the empirical project, with a literature review of what we know about lay attitudes about formation, including the law's inconsistent perspective on whether such attitudes matter. Part III reports the methods and results of four original surveys and experiments. Part IV proposes a framework for thinking about these results and their relevance to doctrinal and policy debates in contract.

  1. THE LAW OF SUBJECTIVE ASSENT

    Like many scholars writing in law and psychology, we adopt a broad view of what it means for particular beliefs and judgments to have "legal implications." That is, there are various ways that a legal system might take notice of parties' intuitions and beliefs about contracts even when they have no conventional doctrinal role. (6) However, contract formation is a somewhat unusual area in which there are also formal mechanisms to account for parties' subjective beliefs about the legal status of manifestations of assent. In this Part, we take up the doctrinal mechanisms for taking seriously subjective assent, before turning in Part II to the behavioral ramifications of subjective assent or lack thereof.

    1. Subjective Interpretations of Objective Manifestations of Assent

      Courts and contracts professors doggedly intone that contracting parties' private views on the enforceability of their agreements are irrelevant to actual legal enforceability. (7) The 1907 case of Embry v. Hargadine, McKittrick Dry Goods Co. provides a vivid example. (8) In Embry, the plaintiff, a term employee, approached his boss, McKittrick, in December to inquire about the subsequent year's employment. (9) McKittrick responded, "Go ahead, you're all right. Get your men out, and don't let that worry you." (10) Embry thought they had a deal; McKittrick denied intending to enter into a legally binding relationship. (11) The court, as is typical, found a contract. (12) Likewise, in the contracts casebook staple Lucy v. Zehmer, defendant Zehmer asserted that he never intended to enter into a contract to sell his land to his neighbor, and was drunk or joking the whole time. (13) Calling the defense "unusual, if not bizarre," the court enforced Lucy's demand for specific performance, ruling that only the parties' objective manifestations of assent, not their secret reservations, mattered. (14)

      Cases like Embry and Lucy present specific examples of a general puzzle: Does contract law care if its subjects are aware of its premises? 5 In some are as, the answer is definitely no. (16) A murderer-for-hire may not recover against his employer by arguing that he was unaware of the proposition that illegal contracts are unenforceable. Nor may a party depending on oral promises argue that a court should enforce them notwithstanding conflicting provisions of a written agreement because she did not know about the parol evidence rule or the statute of frauds. And indeed, Zehmer's belief that manifesting assent in in ebriated jest prevented a meeting of the minds was wrong and irrelevant. (17)

      But in the law of mutual assent, parties' beliefs about contract formation sometimes actually influence case outcomes. In Embry, for example, McKittrick's lack of specific intent to form a contract was not relevant, but Embry's was: the promisee must actually believe in the existence of the contract he is suing under. (18) It was irrelevant if Zehmer was joking, but had Lucy not "actually believe[d]" in the reality of his contract, he would not have prevailed. (19) 20 Cases like Embry and Lucy express a principle of "formation estoppel," identified by Larry Solan as the notion that "when both parties agree that a commitment has been made, the promisor is bound, and when neither believes that a promise has been made, the promisor is not bound. Objective considerations are irrelevant." (20)

      That said, examples of such shared-agreement cases addressing formation rather than interpretation are few and far between. (21) Most of the examples that Solan identifies are ones where interpretation has bled into formation, (22) or where the principle of formation estoppel is only implied in dicta. (23) Lor perhaps obvious reasons, there are relatively few cases where both parties intend to enter into a legally binding relationship but a reasonable person would not, and even fewer where a reasonable person would find them to be bound but they mutually understand themselves to be unbound.

    2. Promissory Estoppel

      According to the Restatement (Second) of Contracts, the triggering condition for promissory estoppel--which provides for equitable relief where contract formalities are missing and reliance is heavy--is a promise that the "promisor should reasonably expect to induce action or forbearance on the part of the promisee or a third person and which does induce such action or forbearance." (24) Of course, which promises we should reasonably expect others to rely on may come down to whether it is reasonable for a counterparty to rely on a noncontractual promise. Indeed, one could read this doctrine to imply that legally unenforceable promises are not ones that the promisor should expect the promisee to rely upon.

      For example, in Hoffman v. Red Owl Stores, Inc., (25) whether the defendants reasonably expected plaintiff Joseph Hoffmann (26) to rely on their promises might have turned on Wisconsin's then-existing state of the law on formation (which did not yet include promissory estoppel). (27) But the court's opinion makes no mention of limiting promissory estoppel's application to future cases as a matter of law. Rather, the question of reasonableness was left to the jury, which was asked to opine about the following unclear question: "Ought Joseph Hoffman[n], in the exercise of ordinary care, to have relied on said...

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