Academic

The Modern-Day "Contract Crisis"

By Gordon Smith, Christine, Hurt, Vic Fleischer, Fred Tung, Lisa Fairfax, David Zaring

In addition to business law courses, I teach torts.  For the past decade or so or so, we have heard talk of the "Tort Crisis."  Although much empirical research has gone in to analyzing exactly how much of a tort crisis there is and how tort reforms have improved the system, the basic rhetoric of the tort crisis is that the tort system is/was broken.  Left to the common law of torts, litigation would have been pursued and been successful that would have caused some parties great financial pain.  And some of these parties, defendants, would have been repeat receivers of this pain.  So, left to the existing system of tort law, claims against various manufacturers, professions and other repeat defendants would have resulted in enormous judgments or settlement payouts that would have crippled, even bankrupted, certain firms and institutions.  The reforms, then, were meant to rewrite tort law to avoid these outcomes.  Of course, it wasn't just that the outcomes would have meant financial ruin to defendants.  That's not justification enough to change the law.  The old system didn't allocate risk well.  The old system would have compensated those that were undeserving and exacted compensation from those who weren't at fault.  The old system did not anticipate our modern world, with modern risks.  The presence of insurance into a system that had not anticipated it skewed both incentives to sue and incentives to be overly cautious.  The system was in crisis, and there was need for overhaul.  Even in midstream.  Torts is not without examples of legislation that affected pending litigation as well as future litigation.

In October, I was at a Torts conference and someone said, "Why do we hear of Torts Crises, but not a Contracts crisis?"  My response in October is my response now:  we are in a Contract Crisis.  In the current financial situation, the common law of contracts, if applied, would result in consequences that would cause financial pain to many folks.  And some of those folks would be repeat recipients of pain.  The common law of contracts generally enforces written contracts with good consideration that are unambiguous where there is no unconscionability or fraud, etc.  So, then, a lot of contracts in place now would be enforced to someone's peril.  Homeowners would be allowed to "put" their underwater homes to their mortgagors; mortgagors would be allowed to foreclose and evict defaulting homeowners; credit default swaps would have to be settled; mortgage-backed securities would be in default; institutions would default on covenants in other agreements; employees of institutions would receive the bonuses that were in their employment agreements; unionized employees would be entitled to the benefits of their collective bargaining agreements.  However, in a piecemeal fashion, government is stepping in.  However, government (the legislative and executive branches of it) isn't "rewriting contracts," as the media announces.  Government is "rewriting contract law," much in the same way it has been rewriting tort law.  Perhaps the parties to the contracts did not anticipate the future, with its (unforeseeable?) risks.  Perhaps the current system of contract law, while anticipating mistakes and Acts of God and changed circumstances, couldn't anticipate panic and market snowballs.  And we will even argue that this is necessary because some are "undeserving" and some are "blameless."  We will talk about universal consequences.  We will talk of how rewriting contract law is necessary to save industries/institutions/markets.

I think there is a lot to think about here, and I've just started ruminating. 

Full post as published by Conglomerate on April 02, 2009 (boomark / email).