Hoffman and Hwang on Contracts Not Performed Because of Pandemic

|The Volokh Conspiracy |

David Hoffman and Cathy Hwang have written an article entitled "The Social Cost of Contract," arguing that the public is a third party to every contract and considering the relevance of that in determining whether courts should enforce contracts whose performance would have been inadvisable given the Covid-19 pandemic. The article is elegantly written, situating specific questions such as the enforceability of force majeure clauses into a broader social context. Although Hoffman and Hwang do not conclude with any absolute recommendations for courts, the thrust of the article is to suggest that courts should not insist on performance of contracts when performance would exacerbate a public health crisis.

I agree with much of what Hoffman and Hwang argue. Hoffman has separately argued (with Eric Lampmann) that nondisclosure agreements suppressing information about sexual harassment ought not be enforced, and Hoffman and Hwang give other examples of contracts that are unenforceable on account of the public interest. Hoffman and Hwang also cite other literature highlighting that contracts are often written in the shadow of regulatory requirements, and more than that, regulators sometimes influence contract terms. "The general public has many reasons to intervene in private contracting–and it does, all the time," they write (emphasis theirs). As the authors recognize, however, there is a difference between affecting private bargains by rendering certain types of bargains unenforceable ab origine or regulating in ways that affect private contracts (neither of which is much in dispute in the pandemic) and interpreting private contracts or even overriding private contract terms to accomplish public goals.

I have several reservations about the possibility of an active judicial role. First, in many pandemic contexts, performance will not occur as a result of legal restrictions. The resolution of such a case therefore allocates the loss, but won't affect the parties' incentives or improve public health. At least when the government bars performance, thus expressing the public interest through regulation, there is little further public interest in judicial allocation of burdens. If a state closes a hotel and so a wedding does not take place, requiring the wedding party to bear the costs of a wedding that did not occur would not advance public health interests. The only cases where expectations about damages might affect the decision whether to hold the wedding are those where the public health authorities are sufficiently uncertain about what to do that they have not banned performance. The hope must thus be that expectation of what judges will do may usefully affect primary conduct even at times where optimal public policy is contested or unclear.

Second, judges may disagree about social cost. If judges have the right to resolve contractual ambiguities based on what is in the social interest, then judges presumably must consider social interests beyond health. The COVID-19 pandemic has reinforcedthat different people have different views about what is in the social interest. Some judges might conclude that proceeding with business as usual is in the social interest and therefore favor performance, while others face nonperformance. Even if limited to health considerations, there is often room for debate. A recent Cornell study, for example, suggests that opening campus will reduce the spread of COVID-19. Should a court accepting such a result decide to impose the loss on a college that decides not to offer classes? Perhaps hosting a wedding is, all health issues considered, socially optimal, if one thinks that the wedding party will otherwise be held in a poorly ventilated home. These may well be weak arguments, but I am skeptical that judges are institutionally well situated to resolve them.

Third, adding social interests to contract interpretation increases the uncertainty about how courts will resolve cases. With greater uncertainty, there will be a greater chance of significant mutual optimism, and so more cases will go to trial, increasing litigation costs. It will take the common law a while to sort out how to apply social welfare-regarding considerations, and by the time the law is clear (if it ever is) it will be too late to give certainty for many litigants, at least during this pandemic. One might argue that so long as judges restrict themselves to cases in which contracts are ambiguous, they won't increase uncertainty. But then there will be disputes about whether a contract is sufficiently ambiguous, just as we see in Chevron cases. Hoffman and Hwang acknowledge that our judicial system is not well situated to process millions of cases. A rule that parties should perform their contracts, at least absent clauses excusing performance, may be much more predictable and thus produce much lower litigation costs.

But I am not sure that this is right, and Hoffman and Hwang offer powerful arguments on the other side. Their work in any event is an important contribution to the small literature on interpreting contracts where performance was thwarted by the pandemic.

Advertisement

NEXT: Seattle's 'Autonomous Zone' Is Dead, But Its Amazon Tax Has Come Roaring Back to Life

Editor's Note: We invite comments and request that they be civil and on-topic. We do not moderate or assume any responsibility for comments, which are owned by the readers who post them. Comments do not represent the views of Reason.com or Reason Foundation. We reserve the right to delete any comment for any reason at any time. Report abuses.

  1. When it comes to contract enforcement not being in the public interest, common law provides some pretty good guidance on those issues. I don’t know how much new ground has to be broken, in a legal sense, to deal with contract enforcement in emergency scenarios.

    As for enforcing non-disclosures when it comes to sexual harassment, I don’t necessarily think it is in the public’s interest to NOT enforce those agreements. In fact, I believe it is in the public’s interest TO enforce those contracts. If one party is given sufficient consideration to not talk about an incident the part paying that consideration should have assurances that the incident will be kept private. And the party’s interest in keeping something like sexual harassment private is substantial. In the end if one party doesn’t want to keep their mouth shut they just don’t accept the payout to enter into an NDA. In circumstances where a party might feel compelled to sign an NDA, say because of unequal bargaining powers, there are already sufficient tools built into contract interpretation to deal with those.

    1. But the issue here is the effect on third parties. Sexual harassment is a touchy subject, so let’s make it… murder. Suppose I like to go around stabbing my employees. Sometimes I get away with it, sometimes the victim catches me in the act and threatens to tell everyone. In the latter case, I pay them generously to sign an NDA, then go right back to my wicked, wicked ways.

      I think people have a folk-intuition that in this setup, the public good of “common knowledge that I’m a murderer” is going to be under-supplied, leading to more unwary employees starting work at StabCo and getting knifed, whereas if they’d known I was a murderer they’d have steered well clear.

  2. Does interest continue to run on damages for breach during the time performance was impossible due to the virus? We’ve seen executive orders tolling limitations periods but nothing as to that.

Please to post comments