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Behavioral Economics and the Impracticability Doctrine

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Behavioral Economics and the Impracticability Doctrine Yeshiva University, Cardozo School of Law LARC @ Cardozo Law Articles Faculty 2005 Rendered Impracticable: Behavioral Economics and the Impracticability Doctrine Aaron Wright Benjamin N. Cardozo School of Law, [email protected] Follow this and additional works at: https://larc.cardozo.yu.edu/faculty-articles Part of the Law Commons Recommended Citation Aaron Wright, Rendered Impracticable: Behavioral Economics and the Impracticability Doctrine, 26 Cardozo Law Review 2183 (2005). Available at: https://larc.cardozo.yu.edu/faculty-articles/203 This Article is brought to you for free and open access by the Faculty at LARC @ Cardozo Law. It has been accepted for inclusion in Articles by an authorized administrator of LARC @ Cardozo Law. For more information, please contact [email protected], [email protected]. RENDERED IMPRACTICABLE: BEHAVIORAL ECONOMICS AND THE IMPRACTICABILITY DOCTRINE Aaron J. Wright* INTRODUCTION Impracticability is about change.^ The doctrine reconciles changed circumstances, discharging contractual obligations when events surrounding the contract vary dramatically from expectations.^ Ideally, impracticability sets parameters for such circumstances, including how drastic the change must be to justify discharge.^ Yet despite centuries of development, the eurrent impractieability doctrine lacks a theoretical foundation, leading to inconsistent ease holdings^ and doctrinal * Editor in Chief, Cardozo Law Review, J.D. Candidate (June 2005); Tufts University, B.A. I would like to thank Professor Paul Shupack for instilling in me a passion for contract law and Professor Dan Crane for his thoughtful guidance. Moreover, I would like to thank Mike Reisman, Rob Lefkowitz, Peter Melamed, and Benjamin Friedman for their superior editmg. would also like to thank my mother, sister, and father for being a constant source of inspiration and love, and importantly Alissa for her boundless love and unquestioned support, especially during the past year. , ^ 1 Cook V. Deltona Corp., 753 F.2d 1552, 1558 (11th Cir. 1985) ("[Cjhange is what impossibility is about."). .,. , AW, 2 See infra Part 1 for an elaborate history of the impracticability doctrine, and ttie circumstances under which the impracticability doctrine excuses contractual obligations 3 For a variety of theories discussing when discharge should be granted, see Andrew Kull, Mistake, Frustration, and the Windfall Principle of Contract Remedies, 43 HASTINGS L J. 1 (1991)' Pietro Trimarchi, Commercial Impracticability in Contract Law: An Economic Analysis, 11 INT'L REV. L. & ECON. 63 (1991); Michelle J. White, Contract Breach and Contract Discharge Due to Impossibility: A Unified Theory, 17 J. LEGAL STUD. 353 (1988); Victor R Goldberg, Impossibility and Related Excuses, 144 J. INSTITUTIONAL & THEORETICAL ECON. 100 (1988); Paula Walter, Commercial Impracticability in Contracts, 61 ST. JOHN'S L. REV. 225 (1987); Robert A. Hillman, An Analysis of the Cessation of Contractual Relations, 68 CORNELL L REV. 617 (1983); John Henry Schlegel, Of Nuts, and Ships, and Sealing Wax, Suez, and Frustrating Things—The Doctrine of Impossibility of Performance, 23 RUTGERS L. REV. 419 (1969); E. Allan Famsworth, Disputes Over Omission in Contracts, 68 COLUM. L. REV. (1968)' Harold J Herman, Excuse for Nonperformance in the Light of Contract Practices in International Trade, 63 COLUM. L. REV. 1413 (1963). For a detailed analysis of examining whether discharge is ever warranted, see Alan O. Sykes, The Doctrine of Commercial Impracticability in a Second-Best World, 19 }. LEGAL STUD. 42 (1990). 4 See generally John D. Wladis, Impracticability as Risk Allocation: The Effect of Changed Circumstances Upon Contract Obligations for the Sale of Goods, 22 OA. L. REV. 503, 600-25 2183 2184 CARDOZO LAW REVIEW [Vol. 26:5 confusion.5 Today, courts rarely find circumstances satisfying the modem requirements of impracticability.^ The rigid requirements of foreseeability and the common law concept of impossibility limit the impracticability doctrine's ability to provide "flexible adjustment machinery,"^ leading scholars to lament that "the court must exercise its equity powers and pray for the wisdom of Solomon" when dealing with the mle.^ Legal economists have examined the impracticability doctrine since the late 1960s.9 Applying traditional miero-economic theory, these scholars have questioned whether the impracticability doctrine promotes efficient exchanges by lowering transaction costs associated with bargaining.'" In 1977, two such approaches appeared consecutively in the Journal of Legal Studies, reaching two contrary results. In an influential article written by Richard Posner and Andrew (1988) (listing an extensive table of cases that involve factually similar factual situations which resulted in different judicial outcomes). 5 See Stephen J. Sirianni, The Developing Law of Contractual Impracticability and Impossibility: Part I, 14 UCC L.J. 30, 31 (1981) (stating that "[jjudicial developments of the doctrine [of impossibility] under Section 2-615 of the Uniform Commercial Code and the common law is largely incoherent"). As aptly explained by James White and Robert Summers: In spite of attempts by all of the contract scholars ... it remains impossible to predict with accuracy how the [impracticability doctrine] will apply to a variety of relatively common cases. Both the cases and the Code commentary are full of weasel words such as "severe" shortage, "marked" increase, "basic" assiunptions, and "force majeure." 1 JAMES J. WHITE & ROBERT S. SUMMERS, UNIFORM COMMERCIAL CODE § 3-10 (4th ed. 1995). 6 Steven L. Schooner explains: Until [1980]. challenges invoking section 2-615's protection made for an almost unbroken succession of failures The recovery obstacles posed by the Code prove equally insurmountable to those encountered at common law. Judged in hindsight, foreseeability and risk allocation appear obvious and the occurrence of a contingency so often seems not extraordinary. Steven L. Schooner, Impossibility of Performance in Public Contracts: An Economic Analysis, 16 PUB. CONT. L.J. 229, 235 n.39 (1986) (citations omitted). 7 U.C.C. § 2-615, cmt. 5 (1996). 8 6 ARTHUR L. CORBIN, CORBIN ON CONTRACTS: A COMPREHENSIVE TREATISE ON THE WORKING RULES OF CONTRACT LAW § 1333 (rev. ed. 1962). 9 See generally Robert L. Birmingham, A Second Look at the Suez Canal Cases: Excuse for Nonperformance of Contractual Obligations in the Light of Economic Theory, 20 HASTINGS L.J. 1393 (1969); Note, The Economic Implications of the Doctrine of Impossibility, 26 HASTINGS L.J. 1251 (1975); Paul L. Joskow, Commercial Impossibility, the Uranium Market and the Westinghouse Case, 6 J. LEGAL STUD. 119 (1977); Richard A. Posner & Andrew M. Rosenfield, Impossibility and Related Doctrines in Contract Law: An Economic Analysis, 6 J. LEGAL STUD. 83 (1977); Christopher J. Bruce, An Economic Analysis of the Impossibility Doctrine, 11 J. LEGAL STUD. 311 (1982). Each analysis acknowledges the contributions of predecessors, while adding unique interpretations and analysis. 19 One main purpose of law and economics is to examine legal doctrine and evaluate its economic efficiency, which is accomplished in the context of contract law by lowering the transaction costs of bargaining. See RICHARD A. POSNER, ECONOMIC ANALYSIS OF LAW 23-28 (6th ed. 2003) (asserting that an economic analysis of the law explains rules of law by examining their relative economic efficiency, under a theory dubbed the "efficiency theory of the common law"). 2005] RENDERED IMPRACTICABLE 2185 Rosenfield, the authors rejected the current rule encapsulated under Uniform Commercial Code (U.C.C.) § 2-615, proposing in its place the "superior risk bearer" model. Paul Joskow, in contrast, used the same micro-economic insights to support § 2-615 and argued that the rule strikes a balance between the rigid rule of enforcing all contracts and a lenient excuse doctrine. However, recent scholarship from the emerging field of behavioral economics has altered our understanding of the way people traditionally imderstand risk assessment and rationality. Over the past twenty-five See Posner & Rosenfield, supra note 9, at 89-92. Generally, the superior risk bearer is the party that is the more efficient bearer of a particular risk, regardless of the party's ability to prevent the risk fi'om materializing. Id. at 90. Details of the superior risk bearer model are found infra Part III. 12 See Joskow, supra note 9, at 154-55, 163. Joskow discusses how a well designed impracticability doctrine reduces transaction costs associated with contracting by reducing litigation costs and preventing extensive negotiations. After a micro-economic analysis, Joskow asserts that U.C.C § 2-615 is such a doctrine. Joskow's interpretation of U.C.C. § 2-615's foreseeability test is fotmd in Part II infra. 13 The field of behavioral law and economics is quickly emerging. Daniel Kahneman and Amos Tversky provide a detailed overview of this field in CHOICES, VALUES, AND FRAMES (Daniel Kahneman & Amos Tversky eds., 2000), as does Cass Sunstein in BEHAVIORAL LAW AND ECONOMICS (2000). Other prominent articles include: Christine Jolls et al., A Behavioral Approach to Law and Economics, 50 STAN. L. REV. 1471 (1998); Russell B. Korobkin & Thomas S. Ulen, Law and Behavioral Science: Removing the Rationality Assumption From Law and Economics, 88 CAL. L. REV. 1051 (2002). Scholars have increasingly applied behavioral economics to contract law. See, e.g., Robert A. Hillman, The Limits of Behavioral Decision
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