351 Excuse Doctrine: The Eisenberg Uncertainty Principle, (Goldberg, Victor P.)
Professor Mel Eisenberg argued in a recent paper for an expansion of the excuse doctrines.He argues that performance should be excused in those instances when parties tacitly assume that a given kind of circumstance will not occur during the contract time (the shared-assumption test).In addition, he argues that there should be a partial excuse whena change in prices would be sufficiently large to leave the promisor with a loss significantly greater than would have reasonably been expected (the bounded-risk test).This paper questions his first proposition by re-examining the Coronation cases and Taylor v Caldwell. His bounded-risk analysis is badly flawed, resting on a dubious proposition, inconsistent with the cases he relies on, and, most importantly, recognizing the wrong set of circumstances in which parties would choose to limit their exposure to large cost changes
352 Letter to the SEC on Money Market Fund Reform, (Gordon, Jeffrey N.)
In the wake of the near-calamitous run on Money Market Funds during last fall’s financial meltdown that produced, among other things, an emergency Treasury deposit guarantee program, the SEC has recently proposed a modest set of reforms.The reform package aims to improve the quality of MMF portfolio securities, shorten maturities, enhance portfolio liquidity, and provide a smoother resolution process for occasions when an MMF has “busted the buck.”The Comment Letter argues that the SEC has failed to grapple with the fundamental problems with MMFs revealed by last fall’s financial crisisand, in the main, its proposals will exacerbate systemic fragility, not reduce it.It is widely appreciated that MMF holders receive an unpaid-for benefit through an implicit, if imperfect, government guarantee of their accrued balances.The flaw with the SEC’s approach is that the regulatory effort to substitute for explicit deposit insurance and to limit the implicit subsidy through restrictions on MMF portfolios adds systemic risk to financial intermediation by heightening the pressure on short-term money markets in the critical function of maturity transformation.This flaw turns out to be fundamental and requires a rethinking of the general MMF framework.
Barring such a wholesale rethinking, a minimum reform strategy should begin with a sharp division between MMFs sold to retail investors, “retail MMFs,” and those that are soldto corporations, life insurers, pension funds and other large purchasers, “institutional MMFs.”The retail MMF is a risk-free (but higher yielding) substitute for a bank account covered by deposit insurance.The institutional MMF is a low-cost specialized provider of a corporate treasury function, a substitute for business entities’ own assembly of a money market portfolio.Retail MMFs should be covered by deposit insurance that is funded by risk-adjusted premiums.Institutional MMFs should give up the promise of a fixed NAV, and disclosure rules should replace mandatory portfolio composition rules.These changes will reduce the systemic risk created by the present MMF regulatory structure both by reducing the risk of “runs” and by reducing distortions in short term credit markets.
354 Banking Reform in the Chinese Mirror, (Pistor, Katharina)
This paper analyzes the transactions that led to the partial privatization of China’s three largest banks in 2005-06. It suggests that these transactions were structured to allow for inter-organizational learning under conditions of uncertainty. For the involved foreign investors, participation in large financial intermediaries of central importance to the Chinese economy gave them the opportunity to learn about financial governance in China. For the Chinese banks partnering with more than one foreign investor, their participation allowed them to benefit from the input by different players in the global financial market place and to learn from the range of technical and governance expertise offered. This model of bank reform contrasts with the privatization strategies pursued in Latin America and Central and Eastern Europe throughout the 1990s. These different experiences stand for alternative strategies of bank reform - one that relies on top down changes of the rules of the game; another that focuses on inter-organizational learning via observation. It suggests that the latter model may be superior under conditions of uncertainty. The paper discusses the costs and benefits of these alternative models in the context of the global financial crisis.
355 Into the Void; Governing Finance in Central & Eastern Europe, (Pistor, Katharina)
September 22, 2009
Twenty years after the fall of the iron curtain, which for decades had separated East from West, many countries of Central and Eastern Europe (CEE) are now members of the European Union and some have even adopted the Euro. Their readiness to open their borders to foreign capital and their faith in the viability of market self-governance as well as supra-national governance of finance is both remarkable and almost unprecedented. The eagerness of the countries in CEE to join the West and to become part of a regional and global regime as a way of escaping their closeted socialist past has both benefited and harmed them. There is little doubt that joining the EU and opening to the rest of the world has helped transform these economies at a pace that otherwise would have been unthinkable. Yet, as the global financial crisis reveals, these countries have also remained exceptionally vulnerable to shocks, including those that originate beyond their sphere of influence. This paper looks for explanations in the governance of finance, i.e. the allocation of de jure and de facto responsibilities over financial systems. It argues that as recipient countries of massive capital inflows CEE countries have largely relinquished policy tools to protect their economies and societies against a financial melt down or to respond effectively in a crisis. The policy choices they made – opening their boarders to capital inflows, limiting regulatory oversight by relying on home country regulators of foreign banks, etc. - were aimed at integrating them into the European and the global financial systems. A frequently overlooked side effect of these policies’ cumulative effect has been that they find themselves once more on the periphery - dependent on the goodwill of multilateral organizations over which they have little sway. The paper discusses two strategies to improve the governance of finance in CEE: A European regulator and the assertion of effect-based regulatory jurisdiction over foreign bank activities.
This Article identifies, justifies, and explains the parameters of a largely ignored but important category of cases - what is here called “preventive adjudication.” In this category of cases, courts offer opinions without any “command” to the parties, and these opinions are meant to avoid future harm, not remedy past harm. Despite receiving little attention in the legal literature, preventive adjudication is pervasive throughout law. It happens in declaratory judgment actions about wills, patents, and unconstitutionally vague statutes; in paternity and maternity petitions; in petitions to have missing persons declared dead; in boundary disputes; in actions to quiet title. This Article explains what preventive adjudication is and how it should and should not be used.
Preventive adjudication is intuitively appealing, because it helps people avoid harm and clarifies the law. But there are downsides to deciding cases in advance instead of waiting for remedial adjudication. The argument for preventive adjudication is therefore a qualified one. This Article identifies not only the merits of preventive adjudication but also the crucial limiting principles. One limiting principle is administrative and error costs; another is the adequacy of discounting, i.e., taking into account the uncertainty of future events. People discount for many kinds of uncertainty, and discounting is usually adequate for uncertainty caused by law. But discounting is inadequate when the law causes uncertainty about inescapable threshold questions for human behavior, such as legal parenthood, citizenship, marital status, or death. Discounting is also inadequate for uncertainty about property rights, because uncertainty undermines the policy reasons for having property rules in the first place. Where discounting is inadequate, preventive adjudication is especially valuable.
This Article also shows how this normative understanding of preventive adjudication can be translated into the actual practice of courts in the United States. Legal systems in the United States have two ways of determining which cases should be decided by preventive adjudication: sometimes they rely on judicial discretion to decide if preventive adjudication is appropriate in each case (“retail sorting”); and sometimes they specify categories of cases in which preventive adjudication is available (“wholesale sorting”). An analysis of both approaches shows that wholesale sorting - which is common in state courts but almost unknown in federal courts - better aligns the actual practice of preventive adjudication with the cases in which it is justifiable.
357 Hoffman v. Red Owl Stores and the Limits of the Legal Method, (Scott, Robert E.)
November 9, 2009
According to the overwhelming majority view, promissory estoppel is not an appropriate ground for legally enforcing statements made during preliminary negotiations unless there is a “clear and unambiguous promise” on which the counterparty reasonably and foreseeably relies. Bill Whitford and Stewart Macaulay were among the first scholars to note the apparent absence of such a promise in the case of Hoffman v. Red Owl Stores. Several years ago, after studying the trial record, I concluded that the best explanation for the breakdown in negotiations was the fundamental misunderstanding between the parties as to the amount and nature of Hoffmann’s equity contribution to the franchise. After locating and interviewing Hoffmann, Whitford and Macaulay tell a different story. They view as insignificant the misunderstanding about the nature of Hoffmann’s equity contribution. Rather, they focus attention on additional statements urging Hoffmann to sell his bakery business and store. In these later statements, ignored by the Wisconsin Supreme Court, they find the “missing promise” that they challenged all of us to look for years ago. While I credit their account, I remain as unconvinced by their story as they are of mine. Thus, the important question is how scholars could draw such different inferences from the same basic facts. In this Essay, I speculate that the different stories are a product of our respective methodological commitments: their commitment to a law and society approach to legal issues and mine to law and economics modes of analysis. Those diverse approaches illustrate the tension between “context” and “theory” and the inherent paradox of legal analysis: without context no legal rule can be applied, but with nothing but context no legal rule can be found. For this reason, I conclude, it is important for legal academics of every stripe to appreciate the biases inherent in their methodology of choice and work to correct for them
358 Free Enterprise Fund v. Public Company Accountng Oversight Board (Strauss, L. Peter)
Vanderbilt Law Review En Banc, Vol. 62, p. 51, 2009
This is the introductory essay in an electronically published roundtable sponsored by the Vanderbilt Law Review on the Supreme Court's forthcoming consideration of Free Enterprise Fund v. Public Company Accounting Oversight Board, a case raising important separation of powers questions and thought by some to foreshadow overruling or limiting of such precedents as Humphrey's Executor v. United States (sustaining independent regulatory commissions) and Morrison v. Olson (sustaining the independent counsel). The PCAOB is an unusual independent government authority appointed by the Commissioners of the SEC and subject to its oversight; PCAOB members are only by the Commission, and only for one of several defined causes. This essay is intended to "set the table" for competing essays by other scholars, that will appear in November.
359 Litigation Governance: Taking Accountability Seriously (Coffee, Jr. John C.)
November 9, 2009
Abstract -
Both Europe and the United States are rethinking their approach to aggregate litigation. In the United States, class actions have long been organized around an entrepreneurial model that uses economic incentives to align the interest of the class attorney with those of the class. But increasingly, potential class members are preferring exit to voice, suggesting that the advantages of the U.S. model may have been overstated. In contrast, Europe has long resisted the U.S.’s entrepreneurial model, and the contemporary debate in Europe centers on whether certain elements of the U.S. model – namely, opt-out class actions, contingent fees, and the “American rule” on fee shifting – must be adopted in order to assure access to justice. Because legal transplants rarely take, this Essay offers an alternative “non-entrepreneurial model” for aggregate litigation that is consistent with European traditions. Relying less on economic incentives, it seeks to design a representative plaintiff for the class action who would function as a true “gatekeeper,” pledging its reputational capital to assure class members of its loyal performance. Effectively, this model marries aspects of U.S. “public interest” litigation with existing European class action practice. Examining the differences between U.S. and European practice, this Essay argues none of these differences are dispositively prohibitive and that functional substitutes, including an opt-in class action and third party funding, could be engineered so as to yield roughly comparable results. Although the two systems might perform similarly in terms of compensation, the ultimate question, it argues, is the degree to which a jurisdiction wishes to authorize and arm a private attorney general to pursue deterrence for profit.
360 Contract Interpretation Redux (Schwartz, Alan and Robert E. Scott)
November 11, 2009, Forthcoming 119 Yale L.J. (2010)
Contract interpretation remains the largest single source of contract litigation between business firms. In part this is because contract interpretation issues are difficult, but it also reflects a deep divide between textualist and contextualist theories of interpretation. While a strong majority of U.S. courts continue to follow the traditional, Aformalist@ approach to contract interpretation, some courts and most commentators prefer the Acontextualist@ interpretive principles as exemplified by the Uniform Commercial Code and the Second Restatement. In 2003, we published an article that set out a theory of contract interpretation to govern agreements between business firms. In that article, we support a formalist theory of contract interpretation. Our article has prompted a number of anti-formalist responses. In our article we argued that, although accurate judicial interpretations are desirable, accurate interpretations are costly for parties and courts to obtain. Thus, any socially desirable interpretive rule would trade accuracy off against contract writing and adjudication cost. This trade-off implies that risk neutral business parties will commonly prefer judicial interpretations to be made on a limited evidentiary base the most important element of which is the contract itself. But importantly, we also argued that commercial parties’ preferences along this dimension will be heterogeneous. Thus, any interpretation rules the state adopts should be defaults and the state should defer to the expressed preferences of particular parties regarding interpretation. This Review Essay clarifies and extends these arguments. We briefly summarize empirical data that support our theory, and respond to our critics. Although much academic commentary suggests otherwise, both the available evidence and prevailing judicial practice support the claim that sophisticated parties prefer textualist interpretation. Sophisticated commercial parties incur costs to cast obligations expressly in written and unconditional forms to permit a party to stand on its rights under the written contract, to improve party incentives to invest in the deal, and to reduce litigation costs. Contextualist courts and commentators prefer to withdraw from parties the ability to use these instruments for contract design. The contextualists, however, cannot justify rules that so significantly restrict contractual freedom in the name of contractual freedom.
