George Mason School of Law Contracts I D. Theories of Enforcement F.H. Buckley fbuckley@gmu.edu

Today 1 The Logic and Limits of Paretian ethics 2. Darwinian economics Greed Altruism and “non-tuism” 2. Darwinian economics Fairness in division 3. Promising from a natural rights perspective 4. Natural Duties and Quasi-contract

The Logic of Parethian ethics

Contract damages solve the PD game problem Player 2 Cooperate Defect 3, 3 2, -3 -3, 2 0, 0 Player 1

What is collectively rational is now individually rational Player 2 Cooperate Defect 3, 3 2, -4 -4, 2 0, 0 Player 1

The trust this generates fosters beneficial reliance Where David would have been had he relied B 100, 100 100 I 200 E 50 150, 50 Ino-reliance David spends only 50 in period 1 100 150 Goetz and Scott, 89 Yale L.J. 1261 (1980)

And results in a wealthier and happier country

The Limits of Paretian ethics Pareto-superiority: one person is better off and no one is worse off Pareto-optimality: no unexploited opportunities for Paretian improvements

How about the more is better assumption? Dollars in Time 1 More is better I2 I1 Dollars in Time 2

But do Paretian standards celebrate greed? Greed is good! Michael Douglas in Wall Street

Do Paretian standards celebrate greed? 222 Broadway OMG!!!! suspenders Closing books Ash tray

Is acquisitiveness always bad? I’m not into the whole rat race thing, man!

When does greed turn into a vice? If greed and sloth are both vices, when (and why) does acquisitiveness become excessive?

The Limits of Paretian ethics Does Paretianism provide a complete moral code?

Does Paretianism provide a complete moral code? What’s left out: compassion, empathy, altruism

Paretianism as “non-tuism” Paretian man is not (or need not be) an altruist He need take no interest in the other person

Paretianism and Altruism Paretian man is not (or need not be) an altruist He need take no interest in the other person Is caring about others always a good thing?

Absolute and Relative Preferences I have absolute preferences when I want more I have relative preferences when I want more than people to whom I compare myself

A bad kind of altruism: Envy

What would envy look like in bargaining games?

Paretianism as neutral about splitting the bargaining surplus On Paretian standards, one person is made better off, and no one is worse off And it doesn’t matter how the gains are divided

The move from A to either B or C is a Pareto-superior transformation Bess E  A  F C   B   D Mary

But there is a zero-sum game at the heart of the bargaining game Bess  E A  F  C   G B  D  Mary

Fairness in division Do we have fairness intuitions about bargaining?

As it happens, a little green man just gave me $100 And he asked me to divide it with you

Fairness in division The Ultimatum Game “Sender” divides up an amount of money “Receiver” can either accept or reject the Sender’s offer If Receiver rejects, no one gets anything

As it happens, a little green man just gave me $100 I’ll keep $95 and offer you $5. Are you OK with that?

As it happens, a little green man just gave me $100 Will you “pay to punish”?

Fairness in division The Paretian is indifferent about how the bargaining gains are to be divided But do we observe fairness constrains in bargaining? Ultimatum Games Fisher and Ury, Getting to Yes The store’s refusal to price-gouge

Fairness in division Franz de Waal

Now … Darwinian Economics Charles Darwin, 1809-82

Now … Darwinian Economics What happens when we take the basic ideas of economics and apply them to evolutionary psychology?

W.D. Hamilton 1936-2000

Hamilton on the Gene’s Eye View Bodies are temporary, genes (or their copies) are forever The gene directs the body Richard Dawkins, The Selfish Gene

Hamilton on the Gene’s Eye View The gene’s command to the body: Be fruitful and multiply

Hamilton on the Gene’s Eye View The gene’s command to the body: Be fruitful and multiply Maximize copies of the gene “Genetic fitness”: what increases the probability that copies of the gene will increase “Genetic cost”: the opposite

Hamilton on the Gene’s Eye View The gene’s command to the body: Be fruitful and multiply Maximize copies of the gene Hamilton’s Rule: Max Benefit (genetic fitness) – Cost (genetic cost)

Individual vs. Evolutionary Rational Behavior Classical economics: Individuals maximize (gains – costs) Evolutionary Economics: Genes maximize (reproductive fitness – reproductive costs)

Sewell Wright’s Coefficient of Relationship A parent and his child share 50 percent of their genes A parent and his grandchild shares 25% Siblings share 50% Cousins share 12.5%

Hamilton on the genetic cost-benefit calculation Hamilton’s Rule: Max Benefit (genetic fitness) – Cost (genetic cost) Gene to Body: be altruistic if rB > C, where r = Coefficient of Relatedness B = Genetic benefit C = Genetic cost

This incorporates Kinship Selection Gene to Body: be altruistic if rB > C, where JBS Haldane: I would give my life for two brothers or eight grandchildren

The Biological Social Compact We take from our parents and, without repaying them, give to our children

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.

Hume on promising “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.”

The largest family firms… Walmart Ford Motors Cargill Mars Koch

What’s the legal take-away from Darwinian Economics? Family businesses The assumption of parental fitness The asymmetry of family support obligations The bequest motive in tax law

Relative Preferences What happens when a sense of relative preferences is added to the bequest motive? I have absolute preferences when I simply want more I have relative preferences when I want more than the next fellow

You’re in the top quintile at present: Of World I and II, which do you prefer?

Is aristocracy the natural default state of society? If we have a bequest motive as to our children, and relative preferences as to how they will fare compared to other people’s children, does this add up to aristocracy?

How we rank on intergenerational mobility Country Immobility U.K. 0.50 Italy 0.48 U.S. 0.47 France 0.41 Spain 0.40 Germany 0.32 Sweden 0.27 Australia 0.26 Canada 0.19 Finland 0.18 Norway 0.17 Denmark 0.15 Correlation of father’s and son’s earnings

Contract and Aristocracy Is the move now from contract to status?

Is aristocracy the natural default state of society? And what does that do for social cohesion and trust?

Why perform promises? You have made a promise. Unless you have a good excuse, you should perform. Why is that?

Why perform promises? If you don’t perform, the institution of promising (contract law) may unravel. And so?

So you’d lose the benefit of trust (beneficial reliance) Contract law as a solution to the trust problem in PD games Promisor makes a credible commitment Promisee is enabled to trust

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.

Is there another explanation for promising and contract law Is there a natural right to have promises performed?

Autonomy Theories To be free and autonomous, I should have the right to enter into a contract

Autonomy Theories To be free and autonomous, I should have the right to enter into a contract But when I do so at time1 I restrict my choices at time2. Self-bonding Whose autonomy do we prefer? If the former, why is that?

Will Theories Can I will an obligation to perform a promise?

Hume on conventions “A promise is not intelligible naturally, nor antecedent to human conventions.”

The need for a linguistic convention Can will theories explain why the institutions of contract law and promising should exist? If they’re not there, how can one promise or contract?

Tonga: Where people don’t promise The Queen of Tonga with the Queen Mother at the Coronation, 1953

Could promising exist without promissory institutions? There is apparently no word for “promise” in Tonganese

Could promising exist without promissory institutions? “I intend to do x, but if I change my mind, well, then was then, now is now.”

Could promising exist without promissory institutions? In such a place, is a will theory intelligible?

Hume on Conventions If Hume is right, it is meaningless to talk about an obligation to perform one’s promises or contracts without an underlying convention of promising or contract law The prior question, then, is whether it is desirable that such conventions should exist

Hume on where we are without promissory or contractual conventions 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.

Hume on where we are with promissory and contractual conventions The conventions of men … create a new motive, when experience has taught us, that human affairs wou'd be conducted much more for mutual advantage, were there certain symbols or signs instituted, by which we might give each, other security of our conduct in any particular incident, After these signs are instituted, whoever uses them is immediately bound by his interest to execute his engagements, and must never expect to be trusted any more, if he refuse to perform what he promis'd.

Hume on Conventions No promissory or contractual obligation can arise without a background promissory or contractual convention. These are “artificial” and not natural Efficiency considerations provide an explanation why such conventions should exist

Quasi-contract But is there another reason to enforce promises?

Some vocabulary Obligation: an “artificial” moral requirement voluntarily undertaken Duty: a moral requirement imposed when not voluntarily undertaken. E.g., tort law duties

Hume on natural duties versus conventional obligations A father knows it to be his duty to take care of his children: But he has also a natural inclination to it. … 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.

Promissory obligations vs. natural duties Obligations are content-independent (so long as not illegal) Natural duties are content-dependent

Promissory obligations vs. natural duties Natural duties are content-dependent Parent’s duties to their children The action for money had and received in Moses v. Macferlan How contractual obligations grew out of natural duties

The slow evolution of a remedy for breach of contract Suppose A sold X goods and X didn’t pay. What remedy is available, before an action for breach of contract? The forms of action

Trespass on the case in indebitatus assumpsit as the remedy for breach of contract 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.

The slow evolution of a remedy for breach of contract Note how this turned breach of contract into the tortious duty not to commit fraud Legal fictions

The rise of quasi-contract out of the forms of action There are natural duties and contractual obligations, but is there a tertium quid of liability for promises we ought to have made?

Moses v. Macferlan B promises to pay A £6, giving him a series of promissory notes A then assigns and endorses these over to C, so C can collect from B. It is a condition of the assignment that C promises not to sue A if B does not pay (a non-recourse note) B does not pay C sues A and collects £6 in a Court of Equity So C recovers in spite of his promise not to sue A then seeks to recover the £6 from C before Lord Mansfield “for money had and received”

Moses v. Macferlan C did not promise that he would account to A for money A was ordered to pay C by the Court of Equity But does he nonetheless have the duty to do so, since the note was non-recourse (i.e., he promised not to sue A).

Moses v. Macferlan 2 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."

Quasi-Contract Does an action lie for a performance which ought to have been made, even where there is no promise? Quasi-contract, unjust enrichment, restitution

Just what does “ties of natural justice and equity” mean? In the circumstances of Bailey v. West?

Bailey v. West Strauss West Trainer Kelly (driver) Bailey

Bailey v. West Was there a contract “implied in fact”?

Bailey v. West 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 Was there an Implied Contract? Restatement § 19(1): What about “by failure to act”?

The Five Guys hypothetical p. 10

Day v. Caton p. 11 Poussin, Summer

What is an implied at law contract? Lord Mansfield

What is an implied at law contract? Quasi-contract Quantum meruit Unjust Enrichment Restitution

Moses v. Macferlan 2 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."

Bailey v. West When is quasi-contractual liability imposed?

Bailey v. West 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 When is quasi-contractual liability imposed? Is consent by the recipient necessary?

Bailey v. West 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 When is quasi-contractual liability imposed? Is consent irrelevant?

Consent and the definition of a benefit? I think orange aluminum siding is neat. When you are on holiday I cover your house with it. A benefit?

What is a benefit? No recovery for “officious” benefits from “volunteers” What does this mean and just how do you tell?

What is a benefit? What about the Good Samaritan?

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

What is a benefit? In what way is the aluminum siding example unlike the day laborer in Day v. Caton?

What is a benefit? 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? Should Bailey be permitted to recover for the first 4 months of board?

What is a benefit? So what would you have advised Bailey?