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Statutes and Rules of Law As Implied Contract Terms: the Divergent Approaches and a Proposed Solution

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Statutes and Rules of Law As Implied Contract Terms: the Divergent Approaches and a Proposed Solution FELDMAN_FINAL_EIC ADJ (DO NOT DELETE) 11/30/2017 2:41 PM STATUTES AND RULES OF LAW AS IMPLIED CONTRACT TERMS: THE DIVERGENT APPROACHES AND A PROPOSED SOLUTION Steven W. Feldman* — “Th[e] principle is itself one of commonsense; even a person with little legal knowledge would be loathe to think that a contract is not subject to existing laws unless they are expressly incorporated.”1 — [The implied incorporation of laws] “can not be accepted as correct,” [because the implied use of statutes and rules of law] “is not a rule of [contract] Interpretation and the statutes and rules of law are certainly not incorporated into the contract.”2 INTRODUCTION ............................................................................ 810 I. THE IMPLIED INCORPORATION DOCTRINE: BASIC ELEMENTS AND POSSIBLE JUSTIFICATIONS .............. 813 A. Basic Concepts ............................................................... 814 B. The Doctrine and the Nature of Contract ....................... 820 C. The Doctrine and the U.C.C. .......................................... 821 D. The Problem of Incomplete Contracts ............................ 822 II. THE UNSATISFACTORY JUSTIFICATIONS FOR THE CURRENT DOCTRINE ........................................................ 823 A. The Presumption that Every Person Knows the Law ..... 823 B. The Doctrine as an “Implied” Contract Term................. 828 C. The Policy Against Abrogation of Existing Laws .......... 839 III. THE IMPLIED INCORPORATION DOCTRINE AND OTHER PRINCIPLES OF STATUTORY AND CONTRACTUAL CONSTRUCTION .................................. 841 *Attorney Advisor, U.S. Army Engineering and Support Center, Huntsville, Alabama. I express great appreciation to David Horton, David Friedman, Christopher Drahozal, and David Hoffman for their careful reviews and helpful suggestions. I especially thank my wife, Gayla Feldman, for her steadfast love and devotion. 1. Wickman v. Kane, 766 A.2d 241, 248 (Md. Ct. Spec. App. 2011). 2. 3 ARTHUR L. CORBIN, CORBIN ON CONTRACTS § 551 at 197 (rev. ed. 1960). 809 FELDMAN_FINAL_EIC ADJ (DO NOT DELETE) 11/30/2017 2:41 PM 810 U. OF PENNSYLVANIA JOURNAL OF BUSINESS LAW [Vol. 19.4 A. The Differing Roles of Statutes and Contracts ............... 841 B. Legislative Intent to Create a Private Contractual Right and Remedy ........................................................................... 843 C. Undue Reliance on Legal Fictions .................................. 846 D. Default Principle or Immutable Rule? ............................ 848 E. Choice of Law and Conflict of Laws .............................. 851 F. Rule of Interpretation or Construction? .......................... 852 G. Parallel Contractual and Statutory Enforcement ............ 856 H. Other Canons of Contractual Construction..................... 858 IV. MODIFICATION OR REJECTION OF THE DOCTRINE .. 859 V. THE IMPLIED INCORPORATION DOCTRINE: A SUGGESTED REFORM ....................................................... 866 CONCLUSION ................................................................................ 869 INTRODUCTION The great majority of state and federal courts accept the general common law rule that courts in construing contracts shall incorporate relevant, unmentioned laws as implied contract terms.3 A common formulation is “the laws which subsist at the time and place of the making of a contract, and where it is to be performed, enter into and form a part of it, as if they were expressly referred to or incorporated in its terms.”4 Dating back to the early nineteenth century,5 this principle of contract construction is a “basic legal concept of longstanding and accepted use.”6 Despite the doctrine’s pervasive theoretical and practical importance as 3. See Armstrong v. Accrediting Council for Continuing Educ. and Training, Inc., 168 F.3d 1362, 1368 (D.C. Cir. 1999) (deeming rule a “common law” concept); 11 SAMUEL L. WILLISTON & RICHARD A. LORD, A TREATISE ON THE LAW OF CONTRACTS § 30:19 (4th ed. 1999) (collecting authorities). 4. Von Hoffman v. City of Quincy, 71 U.S. 535, 550 (1866) (stating also that “[t]his principle embraces alike those [laws] which affect its validity, construction, discharge, and enforcement.”). Von Hoffman is still a leading decision. See, e.g., Acosta v. Tyson Foods, 800 F.3d 468, 474 (8th Cir. 2016) (noting the standard that current laws of the time and place where a contract is made are incorporated into the contract). Other statements of the principle use different terminology but rest upon the same substantive grounds; Pan Am. Comput. Corp. v. Data Gen. Corp., 562 F. Supp. 693, 696 (D.P.R. 1983) (“State laws in existence at the time a contractual obligation is entered into become an integral part of the contract to the same extent as if literally incorporated therein.”). 5. See Camfranque v. Burnell, 4 F. Cas. 1130, 1131 (D. Pa. 1806) (stating that laws are “essentially incorporated with the contract”). 6. Doe v. Ronan, 937 N.E.2d 556, 562 n.5 (Ohio 2010). The United States Supreme Court, twelve federal circuits and forty-one states accept the doctrine. See 11 SAMUEL L. WILLISTON & RICHARD A. LORD, A TREATISE ON THE LAW OF CONTRACTS § 30:19 (4th ed. 1999) (collecting cases). FELDMAN_FINAL_EIC ADJ (DO NOT DELETE) 11/30/2017 2:41 PM 2017] STATUTES AND RULES OF LAW AS IMPLIED CONTRACT TERMS 811 a “silent factor in every contract,”7 courts have failed to articulate a consistent, convincing policy and doctrinal rationale. Most courts also have overlooked numerous doctrinal deficiencies, gaps, and contradictions and, further, have not acknowledged the decisions restricting or even rejecting the precept. Similarly, no commentator has provided an in-depth treatment even though a Westlaw search reveals nearly 1,200 decisions on this topic.8 This Article is the first effort in the literature to undertake a comprehensive descriptive and normative analysis of what will be called the “implied incorporation doctrine.” Replete with presumptions and legal fictions, the principle is an uneasy merger of the rules of statutory and contract construction. This problematic melding of statutory and contractual principles is the main reason for the divergent approaches and doctrinal contradictions. After canvassing the key issues surrounding the principle, I will propose a uniform formulation that better maintains the legal and logical differences between laws and contract. The Article proceeds as follows: Part II poses some possible justifications for the implied incorporation doctrine and discusses some basic doctrinal concepts. After exploring the connection between the implied 7. Silverstein v. Keane, 115 A.2d 1, 7 (N.J. 1955). 8. WESTLAW, Topic 95, Key Number 167: Existing law as part of contract, WESTLAW https://1.next.westlaw.com/Search/Results.html?jurisdiction=ALLCASES&saveJuris=False &contentType=CUSTOMDIGEST&querySubmissionGuid=i0ad740360000015e39cfff8784 f07f00&startIndex=1&tocGuid=I3aef6a39501500a98907e5ad42f43a75&categoryPageUrl= Home%2FWestKeyNumberSystem&searchId=i0ad740360000015e39cfff8784f07f00&kmS earchIdRequested=False&simpleSearch=False&isAdvancedSearchTemplatePage=False&sk ipSpellCheck=False&isTrDiscoverSearch=False&ancillaryChargesAccepted=False&provie wEligible=False&transitionType=CustomDigestItem&contextData=(sc.Default) [https://perma.cc/5EQ3-V8UB] (database last searched Aug. 31, 2017). The only article addressing the canon in any depth, Dolly Wu, Timing the Choice of Law by Contract, 9 NW. J. TECH. & INTELL. PROP. 401 (2012), focuses on just one aspect of the doctrine, i.e., the force and effect of statutes enacted after the parties have signed the contract. All other articles found simply cite the precept in passing. See, e.g., Nelson Ferebee Taylor, Evolution of Corporate Combination Law: Policy Issues and Constitutional Questions, 76 N.C. L. REV. 687, 984 n.1099 (1998) (discussing the doctrine in one paragraph in a footnote); Kevin A. Kordana, Tax Increases in Municipal Bankruptcies, 83 VA. L. REV. 1035, 1047 n. 61 (1997) (containing only a three sentence statement about the doctrine). In the treatises, the Perillo text (JOSEPH M. PERILLO, CONTRACTS § 3.14, at 145-47 (7th ed. 2014)) devotes a few sentences to this topic, the Farnsworth treatise has a paragraph (2 E. ALLAN FARNSWORTH, FARNSWORTH ON CONTRACTS § 7.16 at 351-52 (3d ed. 2004)), the current and earlier editions of the Corbin treatise each have a single section (5 MARGARET N. KNIFFIN, CORBIN ON CONTRACTS § 24.26 (Joseph M. Perillo ed., rev. ed. 1998)); 3 ARTHUR L. CORBIN, CORBIN ON CONTRACTS § 551 (rev. ed. 1960)); the Bruner and O’Connor treatise has a single section (1A PHILIP L. BRUNER & PATRICK J. O’CONNOR JR., CONSTRUCTION LAW § 3:65 (2016), the Murray treatise has no coverage (JOHN EDWARD MURRAY, JR., MURRAY ON CONTRACTS (4th ed. 2001)), and the current Williston treatise has some sections (11 SAMUEL L. WILLISTON & RICHARD A. LORD, A TREATISE ON THE LAW OF CONTRACTS §§ 30:19 to 30:24 (4th ed. 1999)). FELDMAN_FINAL_EIC ADJ (DO NOT DELETE) 11/30/2017 2:41 PM 812 U. OF PENNSYLVANIA JOURNAL OF BUSINESS LAW [Vol. 19.4 incorporation precept and the nature of contract, and considering the enduring problem of incomplete contracts, this Part concludes that the doctrine is best suited under Article Two of the Uniform Commercial Code (U.C.C.) in contracts for the sale of goods. Otherwise, the precept is very much flawed on doctrinal and normative grounds. In assessing the policies often stated as supporting the doctrine, Part III rejects the courts’ undue reliance on the legal fictions that every
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