Legal Process

16 November

• The major questions of contracts:
  1. Can it be enforced? This is a single-institutional question.
     • Fraud: information asymmetry.
     • Incapacity: too young or too mentally challenged to understand the information.
     • Duress: some power was used to force a result.
     • Illegal contract: externalities (impacts on third parties and society are not taken into account by the parties, who are both aware of what they are doing).
     • Unconscionability: this is another market power issue: too significant a disparity between the positions of the parties.
     These are all ways in which a transaction can be imperfect.
  2. How should it be interpreted?
• How can we deal with enforcement questions as a comparative institutional matter? Let's look at unconscionability. If unconscionability is just disparity in positions, then pretty much all contracts are unconscionable (i.e., all contracts will get judicial review). In other words, it's like constitutional law: if $CONDITION then judicial review.

  Just like in constitutional law, if you link judicial review solely to political malfunction, there's always some of that, so you'd be reviewing everything. Likewise with contracts. If all we were looking for was a market malfunction, we'd always be able to find some.

• Weaver
  There's fine print:

  _{if any of our employees injure someone through negligence, the tenant exculpates them; and if anyone sues for negligence and wins, the tenant indemnifies Standard Oil}

  The court decides this can't be enforced. Why would Standard Oil put those provisions in? It's not like the tenant is going to have a lot of money. Maybe to head off lawsuits before they eveng get started. But maybe there's something more subtle at work here, and Standard Oil has a good economic reason for allocating the risk to the station operator.

  If the court strikes down these clauses as unconscionable, have they solved the market malfunction? No: the market power disparity can just relocate to other terms of the contract.

  Contracts are a tool for allocating risks. Let's say that our lease has the following parameters: rent, and a risk clause (exculpatory/indemnifying clauses). The tenant has an upper limit of $500. The landlord has perfectly discriminating monopolistic power: they draft the contract, and they are in a position to extract the max from the tenant.

  • Case 1: it would cost the landlord $20 to bear the risk, and the tenant $30.
  • Case 1a: same as 1, but the tenant doesn't understand the risk
  • Case 2: it would cost the tenant $20 to bear the risk and the landlord $30.
  In Case 1, if the tenant bears the risk (i.e., the risk clause goes into the contract), the rent will be $470. Above that, the tenant won't bite. If there's no risk clause, the rent is $500. And this is what will happen: the landlord makes more this way (because it costs the landlord less to bear the risk).

  In Case 2, the landlord will let the tenant bear the risk (i.e., there will be a risk clause), and the rent will be $480. That's how the landlord maximizes the benefit (i.e., extracts the full $500).

  In case 1A, the rent is $500 and there's a risk clause. Because the tenant doesn't know they're going over their limit.

  So when we're looking for unconscionability, it is not enough merely to look for the presence of a risk clause. You also need to look at price. See the Bethlehem Steel case cited in Weaver (that was about steel for WWI, although the date on the case makes it look like WWII... litigation can be slow).

• A "least cost avoider" is the actor in a transaction who can prevent a loss at the lowest cost. Assume a factory is polluting the air in a residential neighborhood. If it is cheaper for the factory to install a scrubber, move, or stop operations than it is for the residents to move to a new location or otherwise avoid the pollution, then the factory is the least cost avoider. If it is cheaper for the residents to move away from the nuisance, they are the least cost avoiders.
• Nahrstedt
  If we were her attorneys, we'd check to see if the restriction in the deed were recorder. If she had no notice of it, she could prevail.

  Then we'd look at state statutes. And precedent.

  And from the statute, we'd get the "unless unreasonable" language. Now we've got a nice squishy word that lends itself to litigation.

  From cases, we see that in 2 cases intermediate appellate courts did what we want (truck parking and sattelite dish placement). In both of those cases, plaintiffs got judicial review: not just that the restrictions can't be unreasonable, but also that the courts will decide.

  Now we have a pretty good case: the cats are inside the condo and they are quiet. We're not imposing anything on others.

  But how much judicial review will we really get?

  • Benefits of judicial review: fairness, balancing of burdens and benefits
  • Costs of judicial review: there are MANY of these covenants out there. And they're complex in and of themselves (i.e., they vary case by case). It also undermines certainty in the housing market. Plus, property owners and condo associations have to pay to litigate.
  So when we decide whether to expand or contract judicial review, we need to decide no only whether the courts are good at this, but whether they are better than the alteratives. Who are the decision makers here, who do the balancing of burdens and benefits here?
  1. Developer: they were the ones who initially implemented the restriction. Now, taken singly, any given restriction makes the affected parcel less valuable. But applied to a community, it can make them more attractive. So the developer has an incentive to get it right. Of course, they make their decisions up front, and can't foresee changes in circumstances.
  2. Condo association: they decided to enforce. There's greater scrutiny if the restrictions are created by the association than by the developer, because of fears of majoritarian bias (or maybe minoritarian, depending on the composition of the board). On the other hand, they make decisions in the context of present circumstances.
• Wolff and Thacher
  These are both cases about interpretation after time has passed. Basically, is the intent of the parties best carried out by the continued enforcement of the provision, or by ending it? Or, put another way, is there an implied limitation in the contract?

  We already know that the people who made the initial covenants were imperfect decision-makers. But we need to ask ourselves whether the courts are better.

  First Wolff

  The Wolff court is slippery: they say there are no benefits and only costs. But the presence of the other party indicates that there are some folks who want to see it continue. Maybe it's not because the restriction is helpful, maybe it's because the other parties want a piece of the benefit that the plaintiff will be getting. that's probably not the case here, though, just because of the number of people involved (just like how negotiation couldn't work way back in Boomer). There are, like, 800 lots here.

  Now if one person can get out of the restriction, they get all of the benefits of the collective restriction, and none of the burden. So there's not much to infer from the fact that one person wants to get out of the restriction. The restrictions on the corner lots make them buffers: they insulate the rest of the parcels from the influx of businesses there. Those lots are worth less, but the developer thought that was a good plan, because it made all the other lots more valuable.

  So is this a good candidate for getting rid of the restriction?

  Well, it's a close case, and the presence of a dissent makes it clear that there are differences of opinion.

  Now Thacher
  This is an easier case to argue, in terms of changed circumstances: the train, etc... just a lot more has gone on. But there's a fastenating comparative institutional choice aspect to this: maybe there's a decision-maker here that's superior to the courts (and one that wasn't available in Wolff): there are only 2 parties involved here, not 800. This means we can have transactions.

  So the court does remove the restriction, but that was probably not even necessary.

• In Causby: find the uncompensated taking, and figure out why there was no compensation. Also, why is there a taking in Causby but not in Batten? And why does Richards prevail, when it is like Batten, in terms of being horizontal?
• After that, regulatory takings: under what circumstances can the imposition of a regulation be a compensable event?