Author: Jonathan Lipson

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The Sound of Awkward Silence: Contract Social Responsibility (Part 6)

I wanted to start this, my final post, by thanking the keepers of CoOp for allowing me to blog here this month, as I try to sort out my thoughts about contract social responsibility (KSR), the idea that contracts might seek a form of social justice, e.g., eliminating slavery through supply chain agreements or racial discrimination through “inclusion riders” in movie production contracts.

My prior post suggested that KSR differs from the private, pre-political and bilateral contracts that dominate the contractualist imagination because it would use private ordering to achieve public and political goals.  I want to talk today about two analytic approaches that might supplement contractualism, institutionalism and relationalism.

Say what?!?

I also want to talk about the awkward silence that may follow asking hard questions about KSR at home.

But start with “institutionalism,” a broad and fancy term.  I mean by it the study of social organizations at a high level of generality, superstructures in which law is a constitutive but not necessarily defining element.  For my purposes, the variant that seems most tractable sometimes travels under the name “experimentalist new governance” (ENG), a literature often associated with Sabel and Simon.

As they and others have observed, states no longer use command-and-control mechanisms to achieve many public policy goals. Instead, social problems are often solved by public-private partnerships, quasi-autonomous standard-setting organizations, voluntary alliances, monitoring, and experimentation.  Examples include food certification, sustainable forestry, and environmental protection. Read More

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What’s Theory Got To Do With It? Contract Social Responsibility (Part 5)

Prior posts have developed the claim that contract is being used to achieve “social responsibility,” e.g., protecting labor-rights and the environment in supply chain contracts, and preventing racial discrimination in “inclusion riders.”  Assuming parties contract for social responsibility (“KSR”), what might legal theory say about it?

An important strain of contract scholars (“contractualists”) would start from a micro-economic analysis, and ask whether KSR should qualify as “rational” market behavior.  Consider, for example, Schwartz and Scott’s influential statement of contract theory.  Their “affirmative claim” is that “contract law should facilitate the efforts of contracting parties to maximize the joint gains (the “contractual surplus”) from transactions.”

I confess at the outset that I think this mode of analysis can be powerful.  But I am not sure how well it works with KSR, which is what I want to talk about here.

Contractualists, per S&S, might argue that KSR “maximizes joint gains” because it cashes in good publicity, avoids losses, or both.  As observed in prior posts, “doing good” apparently has market appeal, leading to “fair trade,” “green sourcing,” and so on.  Moreover, at least in the supply chain context, it appears that buyers may contractually shift losses to parties that violate KSR terms.  These and similar features of KSR might well maximize welfare.  To this extent, contractualist analysis would account for KSR.

So far, so good.  But there’s a problem.  Schwartz and Scott continue:

The[ir] theory’s negative claim is that contract law should do nothing else. . . . [T]he state should choose the rules that regulate commercial transactions according to the criterion of welfare maximization. . . . A simple categorization of the universe of bargaining transactions will clarify the domain of our theory. A transaction involves a seller (whether of goods or services) and a buyer.

That is, contractualism assumes that contract is private, pre-political, and bilateral (that is, between two parties).  But KSR challenges each of those assumptions. Read More

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Get Out! Jevic To Liquidate After Post-SCOTUS Deal Fails

Get your priorities straight

Last Monday (May 21, 2018), the Bankruptcy Court for the District of Delaware converted the chapter 11 bankruptcy of Jevic Transportation Corp. to a chapter 7 liquidation.  This means that the ten-year effort to “reorganize” the former trucking company will become a straight liquidation supervised by a trustee.

I put “reorganize” in quotes because everyone knew from the start of the case, in 2008, that the debtor could not reorganize in a conventional sense because the business had already collapsed.  Instead, the managers (and the senior lenders) would remain in possession and control of the debtor to engage in an orderly liquidation, which is permitted by chapter 11.  Most believed this was better than a straight liquidation under chapter 7 of the Bankruptcy Code because they would have greater expertise in maximizing asset values, and more flexibility in making distributions, than a chapter 7 trustee, who would be a stranger to the company.

This last point—flexibility in distributions—earned the case a trip to the Supreme Court, where a 6-2 majority held last spring that final distributions must follow the Bankruptcy Code’s order of priority strictly, unless (in simple terms) creditors “consent,” e.g., by voting for a deviation under a plan of reorganization, a cross between a contract and a consent decree, and the presumptive way out of chapter 11.  But, because management could not muster support for a plan, they had tried to resolve the case through a so-called “structured dismissal,” a procedural concoction that had many features of a plan but none of its protections, such as voting.

The details of Jevic are complex, but the bottom line, in my view, is that Jevic is about two things, although it receives attention only for one. First, SCOTUS affirmed—yet again—that “absolute priority” applies in final distributions in any kind of bankruptcy absent meaningful consent to an alternative.  Distributive priority was in dispute here because management and senior creditors did not want to honor the priority payment rights of the debtor’s former truck drivers, who objected to this treatment, and who were the successful petitioners in the Supreme Court. [Disclosure: I was co-counsel to a group of academics who were amici curiae in support of petitioners].  On remand, the parties tried, but could not come to a negotiated deal that respected the Supreme Court’s ruling, so Judge Shannon converted the case to one under chapter 7, which permits no flexibility in distributions.

Absolute priority is important, but not really news, since it has been the law of the land for over one hundred years.

Instead, I think Jevic’s more important, but more subtle, contribution reflects concern about the integrity of the chapter 11 process.  Read More

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Enforce This! Contract (as) Social Responsibility (Part 4)

A prior post made two basic points about the ABA’s Model Terms to protect human rights in the supply chain (Model Terms) as an example of “contract (as) social responsibility” (KSR): (i) they say nothing about substantive human rights standards (and that may be OK), and (ii) the desire to implement these standards through KSR terms may conflict with a desire to limit the buyer’s legal exposure for their violation.

Or not. . .

I want to turn now to what I suspect will be a central doctrinal question presented by KSR terms: enforceability.

I don’t mean enforceability in a technical sense—offer, acceptance, consideration (or equitable substitute)—but instead in a remedial sense:  Who can get a remedy for breach, and what would it look like?  Since the architecture of U.S. contract law sits on a foundation of privity and expectation, KSR may be an awkward fit, for at least three reasons.

First, consider the problem of third-party beneficiaries.   Read More

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Why is Business Law Education So Bad?  Value-Creation by Law Professors

The question posed in the title of this post—why is business law education so bad?—was first asked in a famous and provocative 1984 paper by Stanford law professor Ronald Gilson, Value Creation by Lawyers.

That paper is best known for developing a micro-economic answer to a different—but ultimately related—question: Why would anybody pay for business transactional lawyering?  And, if no one would (or should) pay for those services, why should anyone pay (or be paid) to learn (or teach) them?

The price of bad education

Although the questions are not new, they have become more important as technology and markets transform the practice and study of law.

Gilson argued that there was an economic explanation: lawyers produce and verify information that brings the deal price closer to a hypothetical “true” market value.

Although this question—and Gilson’s answer—have received the most attention, Gilson also had important observations about legal education.  Boiled down, he suggested that law schools should: (1) expose students to the actual transactions in which they were likely to participate; and (2) teach them a legal theory that would help to explain both why these transactions occurred, and why (and how) lawyers would add value by performing services in them.

When Gilson wrote this, law schools struggled with both because, among other things, most legal academics had little transactional experience.  In the more than thirty years since Value Creation, however, law schools have exploded with courses that achieve the first goal, exposure.  It would be difficult today to find a law school that did not offer some form of skills training to prepare law students for careers as business lawyers.  A large and growing literature describes in exquisite detail how to design and teach these courses.

Yet, so far as I can tell, neither the courses nor the literature engage the second half of the problem as Gilson framed it, legal theory. (I put to one side clinics, which have their own literature, as well as skills supplements for traditional classes).  Rather, they focus on “transactional skills” qua skills, such as drafting and negotiating—admittedly vital functions—without considering how legal theory might explain, explore, enhance or critique them.  They have taken half of Gilson’s recommendation and declared victory.

This is a problem for two reasons. First, it seems indifferent (perhaps hostile) to the role that legal theory and scholarship could play here.  Transactional skills literature reads as a series of “recipes,” how-to-get-to-yes-guides insensible to the possibility that, in many deals, “no” may be better the answer. Read More

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Contract (as) Social Responsibility (Part 3): Model Contract Terms

My prior posts (#1 and #2) set up the idea that contract appears to be an increasingly attractive way to do some sort of “social justice,” for example by attempting to reduce labor trafficking in supply chain contracts.  I refer to this generally as “contract (as) social responsibility” (KSR).

A contradiction in terms?

I want to turn now to a thoughtful example of KSR terms, the Model Terms (Model Terms) being developed by the Working Group to Draft Human Rights Protections in Supply Contracts of the Business Law Section of the American Bar Association (Working Group).

The Working Group is led by Professor David Snyder (American University) and attorney Susan Maslow.  Although the Model Terms have not yet been posted, they should be shortly and, in any case, are available from David (dsnyder@wcl.american.edu) and Susan (smaslow@ammlaw.com).  The Working Group’s report and the Model Terms are slated to be published in The Business Lawyer later this year.  [Disclaimer:  I am a member of the Working Group and on the editorial board of The Business Lawyer.  Nothing I say on CoOp should be imputed to them.]

While I should probably post a “spoiler alert” here, I thought it would be helpful to summarize certain aspects of the Model Terms in order to identify some of the issues they and, by inference, other KSR terms may raise.

The Model Terms have two goals that are, perhaps, in tension.

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Contract (as) Social Responsibility (Part 2): Defined Terms

An earlier post set up the month’s agenda:  explore theoretical, doctrinal, and empirical opportunities presented by “contract (as) social responsibility” (KSR).  Before going further, it may be useful to provide some examples and define what I mean by KSR.

Examples

Labor-related terms in supply chain contracts, discussed in the prior post, are a well-known example of KSR, but not the only ones.  Michael Vandenbergh, for example, has argued that supply chain agreements can also be used to advance environmental goals.

But there is a world of KSR beyond supply chain contracts.  Frances McDormand’s speech at the Academy Awards, for example, implored the A-listers in the audience to negotiate for “inclusion riders,” contract terms that would require movie productions to have a certain level of social diversity (e.g., race, gender).  “Impact investing,” according to one enthusiast, “could be one of the most important social innovations in our lifetimes, leveraging the massive power of the capital markets to a higher purpose than maximizing returns for shareholders.” The oldest example I have found so far—and I suspect there are still older ones—is the Beatles’ early performance agreement, which apparently required venues to integrate racially.

Don’t let it be.

KSR can be seen as part of a longer arc of social activism through market action.  From the contested notion that African Americans could use market power to counter the pernicious effects of racism, to Cesar Chavez’s lettuce boycotts of the 1960s, to the South African divestment campaigns of the 1980s, the socially active have long believed that money can do more than talk: it may compel others to walk.  Sometimes, as in apartheid, they may have been right. In other cases, such as black banking, they may not.

Still, we (want to believe that we) can achieve social justice through the beer and coffee we choose to purchase.  Who we see in the media may affect what we believe to be possible in reality, in terms of gender and racial diversity.  Eric Posner and Glen Weyl argue that the “emancipatory force” of “radical markets” “can reawaken the dormant nineteenth-century spirit of liberal reform and lead to greater equality, prosperity, and cooperation.”  Whether or not that is true, there is little doubt that there is demand for social change through market participation.

Because contracting is an important mechanism in market function, the rise of KSR seems, from this perspective, inevitable.  Yet, not all market participation involves contract in any formal sense, and of course most contracting probably does not purport to be socially responsible in the sense that interests me.  So, KSR is at most a (small?) (very small?) subset of contract-based market activity.

Business lawyers love their defined terms–and I am at heart a business lawyer–so what might a definition of KSR look like? Read More

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Bad Bankruptcy?

Although I hope to spend most of May talking about “Contract (as) Social Responsibility,” today’s news that Cambridge Analytica is going into bankruptcy (and the English counterpart) reminds me that an important, severely undertheorized question about corporate bankruptcy is whether, or to what extent, questions of morality and ethics matter  in this context?

We know that Congress takes the morality of consumer debtors seriously.  That, Congress said, was why they amended the Bankruptcy Code in 2005 to “get tough” on consumers who wanted to walk away from their debts.  But with the Weinstein Companies and (earlier) many Catholic dioceses viewing Chapter 11 as a way to convert sins of the flesh to sins of the balance sheet, it is (again) worth asking:  should Chapter 11 be used to cash out (almost) all social problems?

The answers are not easy, and I don’t pretend to have them, but our nearly single-minded focus on the financial, rather than the ethical, aspects of corporate reorganization is, itself, interesting, especially given the very different treatment accorded consumers.  A woman who ran up unmanageable medical bills for therapy following sexual assault by Harvey would find it much harder to use bankruptcy to escape those liabilities than would the Weinstein Company for its respondeat superior debt for the underlying misconduct.

In what world is that the right normative answer:  the corporate perpetrator can walk away, but the victim can’t?  The answer, it would appear, is “ours.”

 

 

 

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Contract (as) Social Responsibility (Part 1): Revenge of the Nerds

On a sunny Saturday morning in April I found myself in an airless room in an exceptionally beige Orlando conference hotel discussing what would, to many, be the nadir of contract nerd-dom:  model supply chain terms.

Supply chain agreements set forth the rights and responsibilities of buyers and sellers of goods that lead to products that affect just about everyone who participates in the market economy.  It reportedly takes about 200 contracts to make an iPhone—a number that strikes me as pretty low.

These contracts are important, of course, but only in the same sense that contract terms on indemnification, ERISA, and choice-of-law are important: they are the province of hardcore law junkies because they are so boring no one would really want to spend time thinking about them unless paid to do so.

And, yet, the Orlando conference room was electric.  That’s because these were not the usual supply chain terms dealing with, e.g., quantity, price, delivery, etc.  Instead, this was a meeting of the Working Group to Draft Human Rights Protections in Supply Contracts of the Business Law Section of the American Bar Association (“Working Group”), and the terms we were talking about seek to solve some of the most troubling ethical problems presented by market globalization:  baseline human rights protections for those who work for or with companies in the modern global supply chain.

I will call these terms one of many examples of “Contract (as) Social Responsibility”: efforts to achieve social justice through contract as a formal, legal instrument.

I find just about every word in the preceding paragraph (including “I” and “will”) to be problematic—in an interesting sort of way—and am grateful to the keepers of Concurring Opinions for permitting me to spend the month of May trying to develop my thoughts on this.

 

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The Arc of Covenant Banking: Hill & Painter’s Better Bankers, Better Banks

banker300px

University of Minnesota law professors Claire Hill and Richard Painter do a great service in their new book, Better Bankers, Better Banks, by focusing concretely on an issue that many have discussed but few have offered to change: how to align the incentives of bankers and banks.

They argue that “bankers [should] be personally liable from their own assets for some of their banks’ debts” for money owed due to insolvency, fines, or fraud-based liability. Thus, they propose formal, liability-creating contracts—which they call “covenants”—between banks and bankers: “Covenant banking operates directly on bankers’ monetary rewards” because, under their proposal, “highly paid bankers would bear some personal liability if their banks become insolvent, are fined by regulators, or are found liable in civil cases involving fraud. The liability would not be unlimited, but should potentially adversely affect the banker’s standard of living.”

The Hill/Painter proposal is valuable and interesting both in its own right, and for the harder questions that it raises.

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