1 Economics, Ethics and Contracting A Primer** A commercial law course like ours celebrates contracts and contract formation.

Every topic we cover includes contracting as its focus or most fundamental element. This reading is intended to help you think about the economic theories and ethical views that underlie all aspects of contracting, from contract formation and performance to breach and remedies. CONTRACTS AND ECONOMICS You know from your Economics courses that economic models provide powerful descriptions of collective behavior. Rational actors do tend to demand less as the price of a product increases. 1 Product or service providers do supply more as the price people are willing to pay increases. Yet, have you ever really thought about the underlying assumptions informing those supply and demand curves in your economics courses? Did you ever consider that the curves actually represent nothing less than many deals or contracts struck by sellers and buyers? Here are some other assumptions that you may have forgotten about those competitive markets and their buyers and sellers. First, they are all rational actors invariably making maximizing choices. Second, the actors have perfect information. They make their choices having digested and understood all available information. Third, the competition among the actors is perfect. That is, there are an unlimited number of competing sellers and buyers, enough to establish important relationships between prices and supply or demand. Fourth, there is nothing about those macroeconomic models that suggests that any of the thousands of contracts comprising the models are unfair. On the contrary, fairness and justice are intellectually irrelevant to the models morality plays no role in economic modeling. Economists know that sometimes the assumptions that underlie markets do not hold. For example, too few sellers may pose competition problems. You have all heard of monopolies and that their inherent lack of competition allows sellers to fix inefficiently high prices. Next, even if our goal is sufficient rather than perfect information, a buyer or seller may lack the kind of information to make a rational choice. You may have bought something touted to be better than it actually is. Perhaps the seller knew more about the product than you did. If you choose to purchase the product without having this information, then the resulting transaction may not be efficient because of a pronounced information asymmetry. Market failure can also arise when market transactions create external costs not borne by either party. These are called externalities or social costs. Water rights provide a good example. An actors decision to dam a creek inures to his benefit, but his downstream neighbor, not the dam builder, must bear the cost of his decision. This leads to an overall inefficient outcome. Finally, sometimes the very notion of rational action is errant. Behavioral economists have determined that our behavior and that predicted for rational action are not always the same. For example, we tend toward risk aversion, so much so that that many of us would view a non-returnable gift of $50 as more valuable than a 60% chance of winning $100 (the old bird-in-the-hand clich actually rings true).
**

I prepared this exclusively for my students. It should not be circulated. I also reserve all rights in the content, such as it is. nr
1

This is, of course, a generalization. You may remember that some goods have an inelastic demand, influenced less by pricing than the standard models suggest.

2 We also tend to elevate the probability of even remote events based simply on how recently an event has occurred. So how do these examples help us understand the economics of contracting? The following subsections address the power and limitations of economics to explain and support contracts. The Efficiency Argument for Freedom of Contracting Because they are vehicles of maximization - a means by which we allocate resources to those who value them the most - contracts tend to be efficient. Stated differently, when two rational actors contract, the economic assumption is that this is an efficient - jointly maximizing - move. For example, if you value your car at $18,000, and a buyer values your car at $20,000, then your respective decisions to sell and to buy the car for $19,000 allow each of you to realize $1000 in value. This is a jointly efficient outcome. Viewed as tools toward economic goals of maximization, contracts are worthy of societies recognition and protection. Ours is a capitalistic system based on people making private decisions about what they value and how best to extract value from available resources. So, if choosing is largely a private concern and contracts represent the method of forming and enforcing these shared choices, then there is a sound economic basis for allowing people to contract as they wish. Freedom of contract is the cornerstone of Adam Smith's conception of markets and the creation of wealth. If people can contract - bargaining freely and making canny choices about their purchases and sales - then societies will stand the best chance of allocating their resources in the a manner that maximizes the overall welfare of the members of those societies. Economists also encourage efforts to reduce the barriers to contract formation and performance, called transaction costs. These latter costs matter a great deal to economists because they subtract from the value the parties will realize from a given transaction. If the two parties contracting for the purchase and sale of the car have to expend time and money forming or performing their contract, then each will realize less than the $1000 in value associated with the transaction. Economic Limits to Freedom of Contract The economic arguments for freedom of contracting have limits. For many of the same reasons that markets may fail, contracts may also fail to meet the efficiency expectations of the parties. The next subsections trace these limits. Two Related Questions: What Can I Sell or Buy? Does Power Really Matter? We already know that societies place limits on what we can buy and sell. Sales of some goods such as illicit drugs are prohibited. Similarly, most societies prohibit prostitution even though one may view it as a service with more than ample numbers of potential buyers and sellers. Is there an economic argument for deeming the sale or purchase of something verboten? The answer is maybe. For example, prostitution may pose freedom issues in that many sellers of sexual favors may represent the less fortunate and even less free of our population. If the assumptions of contracting are that both parties are making free and reasoned choices about what

3 they want to buy or sell, then that assumption may fail as it applies to those selling sex, where there may be elements of coercion in many cases. Power asymmetry can pose real efficiency problems. People are not contracting freely if one of the actors wields a heavy hand in making the contract. No economists would support the enforcement of an agreement in which one party forces another at gun point to sign a contract. Neither would an economist support an agreement in which one side took advantage of someone who is mentally incompetent. Power asymmetries are sometimes associated with scarcity problems. For example, there is an ongoing debate about how best to get human organs to those who need them most. Because the supply of donated organs falls far short of the demand, the current organ donation system has problems. Would applying market principles to organ donations help? Many answer YES. The supply of available kidneys2 might well increase if kidneys were allocated to those willing to pay more for the organs. Yet, some view the application of freedom of contract to this area as inappropriate, even unseemly. If we had an unfettered freedom to contract for the sale of body parts, then how would you view someones decision to sell one of his kidneys to someone who doesnt really need it, but may want to broker it to someone else? Or, would it matter that the buyer wanted simply to turn the kidney into an art object? Its probably fair to state that economically desperate people may be more inclined to sell their organs. Economists may be wary of such transactions because one of the parties enjoyed far more power than the other, and coercion, not free choice, may play a role in the deal. Organs arent the only things that pose scarcity and power problems. You may recall that after massive disasters like Hurricane Katrina some local officials charged gasoline and generator sellers with price gouging because the sellers elevated their prices to take advantage of high demands and low supplies. The local officials claimed this was unfair to buyers. Others claimed that the best way to insure that scarce goods find their way to the victims of the disaster is to allow sellers to raise their prices. This will insure that other sellers will have the incentive to reallocate their goods to the disaster area and that the victims of the disaster will cautiously conserve available stores of these valuable resources. One must wonder how far one can extend this market-based argument. Are you economically justified in charging a rich person a million dollars for a bottle of water when he is about to die from dehydration? How Much Information is enough? Information matters. As noted above, perfect information is an abstraction, but the assumption of any market is that the parties have sufficient information to make informed choices. So how much information is sufficient? While it is almost impossible to delineate an easy rule for solving information problems, it is fair to assume that one of the leading reasons for market failure is information asymmetry. Even economists hold that certain contracts are inefficient because one side of the contract withheld material information from the other side. Disclosure issues pervade the economics of contracting. There are instances where the efficiency goal would likely require one side to a contract to provide material information to the other side. For example, it is likely inefficient for a seller not to disclose material, but latent,
2

Check out the blog archive on the left hand side. Kidney sales were covered on Dec. 6, 2010.

4 defects in a car shes trying to sell to a buyer who has no way of knowing about the problems. In this case, the initiator of the transaction, the seller, has information that any buyer would need to make a rational (or reasoned) choice. It would be inefficient to allow the seller to withhold this information which fundamentally affects both parties valuation of the car. However, a person who has earned degrees in Art History and become an expert in Impressionist art would likely owe no duty to disclose the fact that a painting being sold at a garage sale is a very valuable Renoir . In this case, the buyer has information that only one whos expended a good deal of time, effort and money could have. Requiring the buyer to reveal that information to the seller, the initiator of the transaction, would be tantamount to telling the buyer that the information he spent so much time, effort and money acquiring must be furnished to the seller for free. This would be an inefficient outcome.3 Even these examples are speculative. The application of efficiency standards to contract disclosure cases is anything but simple. What you should garner from this treatment is that information asymmetry can render some contracts inefficient in much the same way that it can contribute to market failure. The Transaction Cost Problem If transaction costs are high, then the value realized by the contracting parties diminishes. Economists argue that, other things being equal, reducing transaction costs increases efficiency. Although the efficiency-based arguments are far more complex than this modest account suggests, they support two related ideas. First, any efficiency account for contracting would include an ease-of-contracting ideal. If it is easy for parties to contract i.e. there are few barriers to contract formation then there will be lower transactions costs and greater efficiency associated with the agreement. Second, most economists would tend to support standard contracting. Standard contracts are form contracts used primarily by sellers to meet their needs of undertaking thousands or even millions of transactions. Examples of standard contracts are the purchase agreements you sign when you buy a durable good like a washer, dryer or car, or the End Users License (EUL) you accept when purchasing or at least downloading software online. Why are standard contracts efficient? Think about the transaction costs if the sellers of goods or services had to use a customized contract for every one of their buyers. While the terms of the contract may not be optimal for all buyers, the pronounced reduction of transactions costs in standard contracting almost invariably produces a net efficient outcome. On the other hand, one may challenge the efficiency of standard contracts based on their take-it-or-leave-it requirement and the fact that sometimes power and/or information asymmetries are part of such transactions. The Problem of Externalities or Social Costs What if a contract between two people causes others (third parties) to bear costs not internalized (borne) by the contracting parties? For example, a contractor and property owner agree that the contractor will build a swimming pool in the owners back yard. However, the noise of construction seriously undermines the ability of worshipers at a Quaker Church to undertake
3

It is important to not that this section relies exclusively on satisfying the efficiency standard. Whether these same results square with all aspects of ethics is another question.

5 their quiet contemplation. Externalities are yet another example of market or contracting failure, at least insofar as the relevant contracting parties are not required or inclined to assume the externally borne social costs. Not doing so leads to inefficient outcomes. How Rational Are We? As the introduction states, sometimes we rational actors do not appear to be that rational, at least by any objective standard. For example, a rational maximizer needs to be prepared to digest all available choices, differentiate among them, and make a rational choice. Yet, we all know that our ability to perceive and work with all information is bounded; i.e. limited by our very human capabilities. Rather than sorting through all the information and applying rational decision rules, we often use rules of thumb or other heuristics to make decisions. Given our bounded rationality, the question is whether our mental and physical limitations should matter in contracting. Examples may be helpful here. Consider those agreements you routinely accept when you download software or other digital media. Do you actually read them? Do you understand them? Would it matter to you that psychologists have found not only that we dont read them but that the licensor or seller knows this and includes terms that most people would not understand unless they consulted an attorney? The same is true of your service provider agreement accompanying your carry everywhere communication devices and your credit card agreements. The key issue here is simple, although the answer is very complex. If were not really as rational as the economic assumptions presume, then to what extent should this matter in our view of contracts as economic tools and our application of efficiency principles to all aspects of contracting? CONTRACTS AND ETHICS Contracts are surely, but not exclusively, economic instruments; thus, they are not simply about efficiency. Contracts are also exchanged promises. Promise keeping matters, not simply because keeping promises is an underlying assumption of efficient markets. Promise keeping is also a central part of any moral code. It underpins all forms of agreements, contracts or otherwise, builds relationships and binds communities. In fact, it is a contract writ very large a social contract4 that holds most countries together. The following subsections set out briefly the moral and ethical aspects of contracting, especially as they relate to various ethical views. Libertarianism as an Ethic: Individual Rights are Paramount Libertarians are the most zealous champions of free markets, freedom of contract, and voluntary exchange. For them, the fundamental rights in the Bill of Rights (such as free expression and religion), the right to own property, and the ability freely to contract, are the most important liberties. Theirs is a world of very limited government, including a very limited role for courts in
4

Our social contract goes something like this. Each of us willingly gives up some degree of freedom in return for the safety and security that government provides.

6 dealing with contract cases. In general, Libertarians want no one and no institution to interfere with these cherished rights. Libertarians hold that if two people choose voluntarily to contract, then the only role of the court is to recognize and enforce the contract. This would hold for both conventional contracts involving every day goods and services and unconventional goods and services such as body parts and prostitution. While they may allow courts to scrutinize whether the parties voluntarily chose to agree, Libertarians would almost invariably want courts to enforce those choices no matter what the object or subject matter of the contract is. There are questions about how much scrutiny of exchange transactions libertarians favor. At one extreme, choice is voluntary if the chooser isnt worse off by opting out of the deal. This would mean that if youre drowning and a passerby offers to save you if youll pay him a million dollars (we might call him a bad Samaritan), then your choice to agree to his offer is enforceable. You were going to drown, opting out ensures this outcome, so you certainly would not be worse off if you opted out. This is extreme, but also relevant, especially as it may apply to coercion and information issues previously discussed. In this case, the threshold for voluntary choice is lower than the threshold that underlies efficiency and the economics of contracting. Alternatively, there are libertarians that echo economic thinking. They would advocate enforcing any exchange that was not the object of coercion, consistent with the ideas discussed previously. Even here, questions arise about whether agreements are enforceable when goods or services are very scarce or when one of the contracting parties may be at a significant disadvantage. For libertarians, contracts pervade every aspect of any society. Communities arent legal entities but rather patchworks of contracts among residents. Corporations are the same. The best way to describe such entities to view them as a nexus of contracts: both internally among managers and employees and externally between shareholders and managers. The shortcomings of libertarianism arise out of the necessary assumptions inherent in its elevation of freedom of contract and the possibility of a very liberal conception of voluntary choice. Just as in the economic discussion already noted, contract failure, like market failure, can occur for a variety of reasons. Even libertarians must understand that the agreements they hold to be so sacred are limited by problems of power asymmetries, coercion, asymmetrical information, and other occasions where free choice may not be as free as a society would want it to be. Utilitarianism: Maximizing Welfare is the Goal Utilitarianism holds that an act or rule is ethically sound if it yields the greatest satisfaction or utility for the greatest number. Utilitarianism, like efficiency, is based on consequences - the results of an action or rule. Whereas efficiency measures economic good, utilitarianism measures something like social good (some view these two things as indistinguishable 5). By its very nature, therefore, utilitarianism is a choice calculus, balancing winners benefits against the losers costs. If the winners pleasure outweighs the losers pain, then the choice yields a defensible utilitarian result.
5

In fact, both utilitarianism and efficiency seek to maximize utility. Some would argue that the utility concept in the two areas is exactly the same.

7 For example, what if a judge must decide between a polluting cement plant and an owner of an adjacent apple orchard?6 The cement plant is clearly polluting the owners apples, so much that the orchard will not survive over time. The owner seeks to enjoin the pollution, which would likely mean shutting it down? Of course, both the plant and the community will resist this, especially if the plant is the primary employer in that community. If the orchard owner successfully closes the plant, then the community will probably wither and die. So, what should the judge do? A utilitarian would measure the good of allowing the plant to continue against the costs, primarily to the orchard owner. Yes, the orchard owner did nothing wrong, and it does appear that the cement plant is violating the owners right to enjoy her property (a not insignificant right, according to the libertarians). But, a utilitarian would argue that the overall good of the community would trump the orchard owners rights.7 Contracts and contracting are very desirable to a utilitarian. Why? In very simple terms: If an agreement benefits both parties, then, insofar as it does not harm others (or its benefits outweigh the harm done to others), it is a defensible utilitarian move. And, the rules that value freedom of contract and maintaining low transaction costs would also be suitable utilitarian rules, again insofar as they lend themselves to net good or utility. Among the problems with utilitarianism is its penchant to measure utility, whether pleasure and pain or benefits and costs. How do we determine what to measure, how to measure it and whether were accurate in our assessments? Virtue Ethics Aristotle emphasized the virtuous life in which people bettered themselves by becoming involved in their communities and polities. The virtuous person is one who seeks purpose in life with a view constantly to improve as a person and so as a citizen. Virtue ethics focus on the good life a life exemplified by happiness and intellectual, physical and ethical growth. The primary focus of virtue ethics is the purpose or teleos of some action, rule or role. If, for example, we had a limited number of clarinets to distribute to a large group of people, one would look at the purpose of clarinets as a primary means of determining who got the instruments. 8 Aristotle would argue that clarinets are meant not only to be played, but to be played well. Thus, we would distribute the clarinets to those musicians most apt to play them well. Unlike the focus on consequences in utilitarianism, virtue ethics elevate both means and ends. Determining the teleos of the practice of contracting, as well as that of different contracts, would be the goal of a virtue ethicist. By so doing, we can identify those characteristics of forming and performing contracts that contribute to the virtuous life.
6

This part is based loosely on the case of Boomer v. Atlantic Cement. See Boomer v. Atlantic Cement . Some of you may recognize the case because Ive used variations of it in many of my classes. When you read the actual case, youll note that I took some creative liberties with it.
7

In the actual case, the judge awarded permanent damages to the owner, essentially requiring the cement plant to purchase a right to pollute the owners land.
8

I borrowed this example from MICHAEL J. SANDEL, JUSTICE: WHATS THE RIGHT THING TO DO? (2009).

8 Aristotle would likely not accept economic efficiency as the most essential purpose of a contract giving people what they want will not necessary allow them to flourish. Rather, he would likely ask how contracts contribute to ones ability to lead a good and virtuous life. Viewed in this light, the purpose of contracts is far more likely to be to contribute to relationship-building through promise keeping and ones worthwhile participation within societys intellectual and civic growth. Contracts are means to bring us together for discussion (negotiation), exchange (agreement) and building better relationships and polities. The teleoi (plural) of contracting are the keys to determining how virtue ethics apply to contracts. While embracing and discussing a spirit of virtuous contracts and contracting is worthwhile, reasonable minds may disagree about what those teleos may be (Aristotle would likely hold that the act of discussing the teleos of contracting is itself a virtuous endeavor). Rules and Duties: Deontology Ethical principles that focus on the means to an end i.e. how one reaches a result rather than the result itself favor deontology, an ethical philosophy exemplified by that of Immanuel Kant (1724-1804). Kants famous categorical imperatives were universal rules that, he claimed, all rational people would embrace as appropriate. One of his most famous imperatives was that people should be treated as ends and never means to some end. Rather than focusing on the overall utilitarian or economic good (result) of contracting, Kant would likely ask what rules and duties rational people would impute to actors within private markets. It may seem rather ambitious to speculate about these rules, but two business school professors, taking a Kantian view, argue that there are rules that rational actors would identify as appropriate for those involved in market-type transactions.9 Their rules appear below. 1. Avoid Harming Others While this rule may seems a rather odd rule for those engaged in market transactions, it makes sense to assume that those who choose to enter, operate within and exit markets (form contracts) can reasonably assume that they will be relatively safe in doing so. For example, those who purchase products and use them in a foreseeable manner should assume that the product will not harm them. 2. Respect Individual Autonomy The cornerstone of market-based transactions is choice. Autonomy champions the ability of individuals freely both to make choices and to enjoy or suffer from the consequences of those choices. Coupled with number 1 above, one can, for example, capture the ethical issues associated with accepting a job that may be somewhat or quite dangerous. An employer respects a potential employees autonomy if the employer provides sufficient information about the job to allow the employee to make a reasoned decision. The employer avoids open and obvious risks of harm to the employee by providing a reasonably safe environment. Cloaked with sufficient information, the employee, by accepting the job, agrees to assume the foreseeable risks and hazards of that job.

See generally Dennis P. Quinn & Thomas M. Jones, An Agent Morality View of Business Policy, 20 ACAD. MGMT. REV. 22 (1995) Quinn and Jones .

9 3. Honor Agreements If contracts are the building blocks of markets, then the parties to those contracts must honor their contract commitments. What this means in the context of contracting is a bit more complicated than it sounds now, but contracting parties must take their commitments seriously and, at the very least, meet their contract counterparts reasonable expectations. In most cases, this means that the parties will do what they promised in the contract to do. 4. Avoid Deception Accurate information is essential to efficient markets. Fraud is an extreme form of information asymmetry, based on one sides decision intentionally to deceive the other side. Any deontological account of contracting would not only discourage fraud but would also view it as an extreme breach of a duty owed by each contracting party to the other. Fraud may arise when a person intentionally makes a deceptive statement, or it may apply when one side withholds a material fact. Deception can also be based on negligence. Even here, the negligent error can pose real problems for the person who needed the information to make an autonomous choice. Although these rules may seem sensible to you, you may already wonder how they would play out in real cases involving real people. One of the criticisms waged against deontology is that stating the rules or recognizing the duties is far easier than applying them. The rules themselves are often the objects of criticism. General rules may seem appropriate, but filling them in to provide for new and different facts creates a potential and complicated maze of hard-to-apply rules. A Theory of Justice John Rawls (1921-2002) was inspired by Kant. Rawls provides another non-consequential view of ethics and justice, but his ideas have a fascinating and interesting twist that you may find useful in helping you think through the relationship between contracting and ethics. In his Theory of Justice, Rawls submits two powerful notions that underlie his assertions about a just society. They are the original position and the veil of ignorance. Consider an original position in which rational people must formulate the appropriate and just rules of society. The future is a blank slate, but one colored by the decisions of these actors. Now, add another dimension to this thought exercise. Suppose that everyone is ignorant of their places in this future society. They know nothing about their future lots. They do not know whether they are men or women, of means or poor, intelligent or mentally challenged, physically capable or disabled. It is within this veil of ignorance that these hypothetical actors must formulate just rules for society. Rawls argues that two rules or principles will logically follow from this thought exercise. His first principle is that each person has the same indefeasible claim to the most basic liberties. His second principle (called the difference principle) is that any social and economic inequalities must satisfy two conditions: a. They must be attached to positions open to all under conditions of fair equality of opportunity; and b. They are to be to the greatest benefit of the least-advantaged members of society.

10 These two rules focus on societal justice. To understand the value of Rawls reasoning as a general guide to ethical reasoning, one must first conclude that justice is a more difficult term to understand and apply than efficiency. Unlike efficiency, which focuses on maximization, justice focuses on fairness. We can all conclude that adding two cows to a groups herd is an overall efficient move because it increases the collective wealth of the herders. However, when we try to decide how those herders will share in the fruits of their labors, it becomes more difficult. Will they share equally? Does this depend on the amount of time and effort each expends in tending the herd? Does it matter that some of those who depend on the herd are disabled? Whats most attractive about Rawls theory is that the formulators of the rules will likely be more inclined to establish fair principles if they have no preconceptions about how those principles will affect them. Now, how might Rawls notions of justice affect contracting? Although he focused on large societal ideals such as income distributions, Rawls would likely have emphasized rules of justice for contracts that relate to matters weve already covered. For example, not knowing ones lot in advance of contracting would certainly color the way one perceives the fairness surrounding contract formation. If you cannot identify yourself as a creditor or debtor or as a manufacturer or consumer, then you may be more sympathetic to the less fortunate or at least the person who may not call the shots in the bargaining process. It is not certain that Rawls would frown on all standard contracts, but it is probably fair to state that his theory of justice may discourage many of the standard forms used in todays commercial and consumer environments, especially those that appear to be rather heavy-handed. Yes, these may reduce transactions costs, but this may be at the expense of forcing egregious terms on unsuspecting parties. As important and related to standard contracts, Rawls would likely support some theory of unconscionability. In contract usage, the term unconscionability relates to contracts or terms within contracts that are shockingly unjust. The common law responded to such contracts or terms by allowing courts to strike them as violations of public policy. Obeying Common Law Because law, or at least legal disobedience, is often accompanied by consequences - as fines or imprisonment for criminal cases or damages in civil cases - people often view law as more important and substantive than ethics. They often view ethics as soft and simply as aspirations rather than more meaningful norms. Yet, law and ethics have much in common. Perhaps the most important intersection between ethics and law lies in the common law the court-made laws flowing from judicial decisions. To really understand the significance of the common law as a regulatory force, consider the fact that virtually all areas of private law such as torts, contracts, property law, and agency, originated in the common law. That is, courts assigned legal rights and liabilities on a case-by-case basis, using their previous decisions as precedents. As you embark on the study of the Uniform Commercial Code, you should know that many of its most important provisions were first recognized and applied by courts in judicial decisions using common law reasoning. Even today, common law continues to play an important part in most areas of private law. So how does one go about obeying common law? And, how does common law obedience relate to ethics? In short, to obey common law is to be sufficiently conscious of ones surroundings and community to understand and apply the local ethical norms.

11 If this sounds abstract or odd to you, then consider this. Suppose that your business has a supply of a non-regulated, but toxic chemical.10 You know its toxic because it was your company that developed the chemical. The government agencies charged to regulate your industry have never heard of the chemical. Do you believe that you should suffer no legal consequences for allowing this chemical to be introduced into the cities water supply? This is an important question, one that implicates the common law. The common law has historically provided the formal mechanism for responding to objectively obvious moral lapses like this, even though there exists no written law forbidding the conduct. Once again, this may seem odd to you, and the institutions that would tend both to defend and explain the common laws operations are beyond the scope of this work. However, over the years, the common law has often become the vehicle for effecting justice when no other legal device could. The justice in such as case is the recognition of some civil remedy against the violator. As important, a study of the development of this institution yields a common narrative about what it means to obey common law. Obeying common law means generally to meet the reasonable expectations of those foreseeably affected by your acts or decisions. Do you believe that you met the expectations of your community by spilling the chemical in their water? Im guessing your answer is no. For over two centuries the common law has evolved based on the ideas stated above. Courts have resolved cases, reviewed them in subsequent cases, retained and enforced those cases that seem to make sense, and disposed of those that did not. Over time, a body of common law rules for areas of private law emerged. If you think about it, obeying common law sounds a lot like a deontological imperative. It may also be a nice working answer to the question: How can I behave ethically and obey the law? Contracting and Policy: A Case The following case is intended to help you sort through the economics and ethics issues advanced above. As you read the case, think about the policies raised in general and by the parties involved. The Case of the Windblown Widow Adapted from Daniel Ostas, The Case of the Windblown Widow, The JOURNAL OF LEGAL STUDIES EDUCATION, Volume, 11, pp. 209-26 (1993) When a tornado swept through Wichita, Kansas, many lost their homes, and many more lost power for several days. Ms. Hazel Weeling, an eighty-eight year old resident of Wichita, was lucky. Her home was intact, and she had full power to her house. However, she discovered after the storm that the fifty year old oak tree that once stood in her front yard was lying across her driveway. She would not be able to get her car out of the garage until someone removed the tree. Every tree service in town was busy when she called them. The earliest any would be able to remove the tree was the next week. She needed to get the car out so that she could drive to the grocery store and pharmacy. She had no family in Wichita, and barely knew her neighbors.
10

I borrowed this example from my colleague, Dan Ostas. See Daniel T. Ostas, Cooperate, Comply or Evade? A Corporate Executives Social Responsibility with Regard to Law, 41 AM. BUS. L. J. 559, 581-86 (2004).

12 Then, good news. The door bell rang. It was a man who claimed to work for Universal Tree Service. Hello, my name is Tim. I work for Universal Tree Service. Id be glad to remove your fallen tree. Hazel was relieved to see and hear Tim. She asked: Can you do this today or tomorrow? I can do it right now, Tim answered. Thats wonderful, but how much will I owe you? replied Hazel. Twelve hundred dollars, answered Tim. Oh, I just dont have that much money, said Hazel, Could I pay it in installments? Probably so, answered Tim. The amount shocked Hazel. It would take most of her savings to pay this amount. However, she was desperate, and Tims response that she could probably pay it back a portion at a time relieved her some. OK, said Hazel, I agree. As Hazel waited inside to hear the roar of a chain saw, she heard her door bell ring again. When she answered, there stood Tim with papers in his hand. Maam, Ill need you to sign these papers before I start. What are they, asked Hazel. Its a contract, replied Tim. Hazel glanced at the two page contract, saw that Tim had filled in the amount of $1200 and quickly signed it. Tim went to work. He completed the task in about five hours and did a respectable job, except for one mistake. Toward the end of his work, he was not being especially careful with the chain saw. Because of this, the saw kicked back from one of his tree cuts, and hit the corner of Hazels house. A large chunk of the house came loose when Tim pulled the saw back. Two days later, Hazel received a bill from Universal Tree Company. It stated that the $1,200 contract price was due within one week. Of course, this shocked Hazel who assumed that she would pay the amount in installments. Later that day, as she was watering her roses, Hazel saw the large hole in her house caused by Tims negligence. This, along with the immediately due bill, angered her. Hazel now refuses to pay the $1,200. After an extensive investigation, she determines that the damages to her house from Tims negligence amount to $800. She also discovers that none of the other tree services in Wichita would have charged her more than $800 for this job. She concludes, therefore, that if Universal had charged her the proper amount, $800, and that if she deducts the damages to her house, then she owes Universal Tree Service nothing. Of course, Universal Tree Service disagrees. Among their claims is that the contract Hazel Weeling signed

13 included a provision stating that Universal Tree Service is not responsible for any damages arising from this contract and due to the contractors performance. * * * Questions: 1. Be prepared to identify the policies that support Ms. Weelings and Universal Tree Services arguments. 2. How much should a signed contract matter in a case like this? 3. Be prepared to discuss Hazel Weelings argument about the contract price. 4. What about the exculpatory provision in the contract stating that Universal is not responsible for their own performance?