George Mason School of Law

1

George Mason School of Law

Contracts I

D.Theories of Enforcement

F.H. Buckley

[email protected]

Today1.Some remaining problems with Paretian ethics

1. Fairness in division

2. Greed

3. Envy

2.Darwinian economics3.Promising from a libertarian, non-economic perspective4.Quasi-contract

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Fairness in division

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Some of you had problems with Paretian ethics One person better off, no one worse

off

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As it happens, a little green man just gave me $100

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And he asked me to divide it with you

The ultimatum game


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And if you turned down $5 you’re not a Paretian


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You “paid to punish”


The Paretian is indifferent about how the bargaining gains are to be divided

One can’t say “that wasn’t a fair split”

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The move from A to either B or C is a Pareto-superior transformation

Mary

Bess

A

B

C

D

E

F

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Anything within the bargaining lens works

Mary

Bess

A

B

C

D

E

F

Are you OK with that?

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What about greed?

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Do Paretian standards celebrate greed?

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Greed is good!

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Dollars in Time 1

0 Dollars in Time 2

More is better: I2 > I1

I1

I2

More is better

Is acquisitiveness always bad?

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I’m not into the whole rat race thing, man!

Can you distinguish between normal acquisitiveness and greed?

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How does envy come in?

Gericault, Portrait

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How does envy come in?

The Paretian is not a “nontruist,“ not an altruist. He doesn’t have preferences as to other

people

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Varieties of envy

The Paretian is not a “nontruist,“ not an altruist. He doesn’t have preferences as to other

people Which excludes both charity (positive

altruism) and spite (negative altruism)

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Varieties of envy

Is Spite always bad?

Malicious SpiteGreat Expectations’ Miss Havisham

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X imposes a cost on Y

But there’s also Benign Spite: Horatio at the Bridge

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X imposes a cost on Y to benefit Z


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You “paid to punish”:Was that benign or malicious spite?

Now … Darwinian Economics

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W.D. Hamilton

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Hamilton on the Gene’s Eye ViewThe selfish gene

Bodies are temporary, genes (or their copies) are forever

The gene directs the body

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The gene’s command to the body: Be fruitful and multiply

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The gene’s command to the body: Be fruitful and multiply Maximize the (copies of the) gene Max B (genetic fitness) – C (genetic cost)

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Hamilton’s insightWhat about relatives?

From the gene’s perspective, promoting genetic success includes kin with whom one shares one’s genes The coefficient of relatedness r

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What about relatives?

What is r? We share 50% of our genes with our

parents, children and (non-identical) siblings, and 25% with grandchildren

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Hamilton’s Rule

Gene to Body: be altruistic if rB > C, where

r = the genetic relatedness of the recipient to the actor, B = reproductive benefit gained by the recipient of the altruistic act,

C = reproductive cost to the individual performing the act

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Altruism and Kinship Selection

Gene to Body: be altruistic if rB > C, where

r = the genetic relatedness of the recipient to the actor, B = reproductive benefit gained by the recipient of the altruistic act,

C = reproductive cost to the individual performing the act

JBS Haldane: I would give my life for two brothers or eight grandchildren

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Altruism and kinship selection

One imagines r taking a value between 0 and 1 But can you see how r might be greater than

1?

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George VI bids goodbye to Princess ElizabethJan. 31, 1952

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For George VI, as to Elizabethr = 2.5 in three generations

Asymmetry of relatedness

Which is how we are to understand the social contract

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Cordelia understood this, Lear didn’t

CORDELIA: I love your majestyaccording to my bond; nor more nor less.

Hamilton’s RuleAltruism and kinship selection

Can you see how r might be less than 1?

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Hamilton’s RuleAltruism and kinship selection Benign spite:

Suppose I wish to impose a genetic cost on Y (to whom I am unrelated) in order to confer a genetic benefit on Z (with whom I am related and with whom Y is in competition)

In that case ry – rz is a negative number

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The limits of kinship selection

Such altruism as we see, amongst men and animals, is importantly explained as a genetic survival instinct that prefers brothers to strangers

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Strangers vs. Brothers

Unto a stranger thou mayest lend upon usury; but unto thy brother thou shalt not lend upon usury: that the Lord thy God may bless thee Deuteronomy 23:20.

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Hume on promising

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“Men being naturally selfish, or endow'd only with a confin'd generosity, they are not easily induc'd to

perform any action for the interest of

strangers, except with a view to some

reciprocal advantage.”

What kind of economy would we have in a kinship selection society?

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What kind of economy would we have in a kinship selection society?

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Edward Banfield’s “Montegrano”Chiaramonte, Italy

What’s the take-away from Darwinian Economics?

Spite as a barrier to Coasian bargains. You turned down the ultimatum game.

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Families matter in business A constrained sympathy for non-family

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The bequest motive in tax law

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Inequality and immobility Is aristocracy the natural state of

society? What happens when a sense of relative

preferences is added to the bequest motive?

How then would you expect the law to look?

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Inequality and immobility Is aristocracy the natural state of

society? How would you design contract law to

produce an aristocracy?

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Why perform promises?

Efficiency and Libertarian (autonomy) theories

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Contract Law from an economic perspective

Contract law as a solution to the trust problem in PD games Promisor makes a credible commitment Promisee trusts

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Relies Doesn’t Rely

PerformsBeneficial Reliance

Loss of Beneficial Reliance

Doesn’t Perform

David

Ebenezer

Credible commitment permits beneficial reliance

Hume on Beneficial Reliance

Your corn is ripe to-day; mine will be so tomorrow. `Tis profitable for us both, that I shou'd labour with you to-day, and that you shou'd aid me to-morrow. I have no kindness for you, and know you have as little for me. I will not, therefore, take any pains upon your account; and shou'd I labour with you upon my own account, in expectation of a return, I know I shou'd be disappointed, and that I shou'd in vain depend upon your gratitude. Here then I leave you to labour alone: You treat me in the same manner. The seasons change; and both of us lose our harvests for want of mutual confidence and security.

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Are there non-economic explanations for why promises are binding?

Consider the stakes: corporate law, bankruptcy, secured lending, securities law

Family law? Constitutional law?

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Varieties of libertarian theories

Autonomy

Consent

Will

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Autonomy Theories

In order that I be as free as possible it is necessary that I should be permitted to bind myself Positive Liberty: Freedom as the

expansion of the domain of alternatives

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Autonomy Theories

In order that I be as free as possible it is necessary that I should be permitted to bind myself But if I promise I limit my future

autonomy, and why is ex ante autonomy better than ex post autonomy (except from an economic perspective)?

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Autonomy Theories

Can autonomy theories explain why the institution of contract law should exist? If it’s not there, how can one promise?

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Autonomy Theories

And if the game of biathlon golf didn’t exist, one couldn’t play it.

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Consent Theories

Can I bind myself at law or in morals by giving my consent to an act?

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Consent Theories

Can I bind myself by giving my consent to an act? E.g., I consent to your taking something

which belongs to me

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Consent Theories

Problem: Do I have the right (or the power) to bind myself with a contractual obligation where the institution of contract law doesn’t exist?

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Will Theories

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Can I will an obligation to perform a promise (e.g., by clenching my teeth)?

Hume on conventions

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“A promise is not intelligible naturally, nor antecedent to

human conventions.”

Will Theories

Suppose the institution of promising doesn’t exist: Can will theories explain why they ought to exist?

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Will Theories

Suppose the institution of promising doesn’t exist: Can will theories explain why they ought to exist?

Suppose the institution of promising exists: Can will theories explain why it shouldn’t be abolished?

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The Humean Account of Promising Assumes that happiness is desirable,

that institutions which promote happiness are morally desirable.

Assumes that people are happier in societies with promissory institutions.

Grounds a duty to perform one’s promises in the duty to support just institutions one has invoked.

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So the value of promissory institutions may supply a justification for enforcement

But is there another reason to enforce promises?

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Some vocabulary

Obligation: a moral requirement voluntarily undertaken

Duty: a moral requirement imposed when not voluntarily undertaken

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Is there a tertium quid?

Obligation: a moral requirement voluntarily undertaken

Duty: a moral requirement imposed when not voluntarily undertaken

What about requirements we ought to have voluntarily undertaken?

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Natural obligations?

A father knows it to be his duty to take care of his children: But he has also a natural inclination to it. And if no human creature had that inclination, no one cou'd lie under any such obligation. But as there is naturally no inclination to observe promises, distinct from a sense of their obligation; it follows, that fidelity is no natural virtue, and that promises have no force, antecedent to human conventions. David Hume

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The common law struggles with the basis for enforcement

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Suppose A sold X goods and X didn’t pay. What remedy? And what should the pleading look like?

Pleadings: Trespass on the case in indebitatus assumpsit

The King to the sheriff &c. as in Trespass to show: for that, whereas the said X heretofore, to wit (date and place) was

indebted to the said A in the sum of £ for divers goods wares and merchandises by the said A before that time sold and delivered to the said X at his special instance and request.

and being so indebted, he the said X in consideration thereof afterwards to wit (date and place aforesaid) undertook and faithfully promised the said A to pay him the said sum of money when he the said X should be thereto afterwards requested.

Yet the said X, not regarding his said promise and undertaking but contriving and fraudulently intending craftily and subtilly to deceive and defraud the said A in this behalf, hath not yet paid the said sum of money or any part thereof to the said A (although oftentimes afterwards requested). But the said X to pay the same or any part thereof hath hitherto wholly refused and still refuses, to the damage of the said A of ___ pounds as it is said. And have you there &c.

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So the basis for enforcement is unclear in the 16th century B give A promissory notes amounting to £6. A then sells and endorses these over to C. C promises not to sue A if B does not pay. B does not pay C sues A and collects £6 in a Court of Equity A sues C for £6 before Lord Mansfield

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Moses v. Macferlan2 Burr. 1005 (1760) per Lord Mansfield

"This kind of equitable action, to recover back money, which ought not in justice to be kept, is very beneficial, and therefore much encouraged. It lies for money which, ex aequo et bono, the defendant ought to refund; it lies for money paid by mistake; or upon a consideration which happens to fail; or for money got through imposition, (express or implied) or extortion; or oppression; or an undue advantage taken of the plaintiff's situation, contrary to laws made for the protection of persons under those circumstances. In one word, the gist of this kind of action is, that the defendant, upon the circumstances of the case, is obliged by the ties of natural justice and equity, to refund the money."

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Just what does “natural justice and equity” mean?

In the circumstances of Bailey v. West?

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Bailey v. West

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Strauss West

Trainer

Kelly (driver)

Bailey

Bailey v. West

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Was there a contract “implied in fact”?

Bailey v. West

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Restatement § 19 CONDUCT AS MANIFESTATION OF ASSENT

(1) The manifestation of assent may be made wholly or partly by written or spoken words or by other acts or by failure to act.

(2) The conduct of a party is not effective as a manifestation of his assent unless he intends to engage in the conduct and knows or has reason to know that the other party may infer from his conduct that he assents.

(3) The conduct of a party may manifest assent even though he does not in fact assent.

Bailey v. West

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Was there an Implied Contract? Restatement § 19(1): What about

“by failure to act”?

The Five Guys hypothetical p. 10

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What is an implied at law contract?

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What is an implied at law contract?

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Quasi-contract

Quantum meruit

Unjust Enrichment

Restitution

Moses v. Macferlan2 Burr. 1005 (1760) per Lord Mansfield

"This kind of equitable action, to recover back money, which ought not in justice to be kept, is very beneficial, and therefore much encouraged. It lies for money which, ex aequo et bono, the defendant ought to refund; it lies for money paid by mistake; or upon a consideration which happens to fail; or for money got through imposition, (express or implied) or extortion; or oppression; or an undue advantage taken of the plaintiff's situation, contrary to laws made for the protection of persons under those circumstances. In one word, the gist of this kind of action is, that the defendant, upon the circumstances of the case, is obliged by the ties of natural justice and equity, to refund the money."

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Bailey v. West

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When is quasi-contractual liability imposed?

Bailey v. West

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When is quasi-contractual liability imposed? Benefit conferred on defendant by

plaintiff Appreciation by defendant of the benefit Acceptance and retention of benefit by

defendant where it would be inequitable to retain the benefit without payment

Bailey v. West

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When is quasi-contractual liability imposed? Is consent by the recipient necessary?

Bailey v. West

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When is quasi-contractual liability imposed? Is consent by the recipient necessary?

You ask me as your agent to trade your horse for a cow. I do so, and get a bribe of $100 which I pocket

Bailey v. West

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When is quasi-contractual liability imposed? Is consent irrelevant?

Consent and the definition of a benefit?

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I think orange aluminum siding is neat. When you are on holiday I cover your house with it. A benefit?

What is a benefit?

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No recovery for “officious” benefits from “volunteers” What does this mean and just how do

you tell?

What is a benefit?

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What about the Good Samaritan?

What is a benefit?

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What’s the difference between aluminum siding and the Good Samaritan?

Day v. Caton p. 11

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Poussin, Summer

What is a benefit?

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In what way is the aluminum siding example unlike the day laborer?

What is a benefit?

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In what way is the aluminum siding example unlike the day laborer? The informational problem

How might the informational problem be cured?

What is a benefit?

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Should Bailey be permitted to recover for the first 4 months of board?

What is a benefit?

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So what would you have advised Bailey?

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