Contract Law Archives – Southern California Law Review

Artificial Incompetence? Unpacking AI’s Shortcomings in Contract Drafting and Negotiation

January 2026January 2026Carly Snell*

INTRODUCTION

This Note was inspired by my time as a data center procurement contracts intern during the summer after my first year of law school. In this role, I assisted contract analysts and attorneys with their procurement of space in data center facilities by contracting with data center suppliers. I regularly reviewed contract redlines from suppliers, identified non-market or disadvantageous terms in those contracts, and suggested changes for the next “turn of the redlines,” or when the company would return the contract to the supplier with new edits to the document. An impactful conversation with my manager about artificial intelligence’s potential as a useful tool in a transactional lawyer’s toolbelt inspired a deeper dive into the benefits and drawbacks of applying artificial intelligence (“AI”) to the contract drafting, redlining, and negotiation space—ultimately leading to the development of this Note.

After the internship concluded, I began my second year of law school. While the most noticeable change upon my return was that I was no longer a first-year student, I also immediately observed a greater emphasis on AI in legal education than before. My law school offered a course on AI’s legal applications, peers used AI to supplement their studies, and professors emphasized the importance of mastering AI during law school, as it would be an essential tool in future legal practice. Similarly, students at other law schools honed their negotiation skills against AI chatbots¹ and even developed their own AI-driven case briefing technology.²

As with the implementation of any new technology, however, there are some points of contention that arise when applying AI to the law—especially in the context of contract drafting, formation, and negotiation. This Note covers four main challenges to applying AI to contract drafting: (1) contract law principles, (2) equity concerns, (3) accuracy issues, and (4) legal profession challenges. Additionally, this Note presents the results of a novel empirical study designed to test AI technology’s tendency to discriminate when tasked with negotiating a contract on behalf of different types of clients. Interestingly, ChatGPT, a popular AI chatbot,³ appears to favor corporations and nonprofit organizations over individuals when acting as a negotiation assistant.⁴ This finding suggests that the excitement surrounding AI’s potential uses in the legal field⁵ is premature, and professionals should hesitate to implement this technology in contract drafting and negotiation until algorithmic discrimination is adequately addressed.

Part I of this Note introduces the historical development of AI technology and its rise to stardom that began with the public release of ChatGPT in 2022.⁶ Part I then describes early applications of AI technology to the contracting space, such as Spellbook, Harvey, and LegalSifter.⁷ After that, Part I discusses fundamental contract law principles, such as mutual and constructive assent, that AI contract drafting may not readily align with.⁸ Finally, Part I concludes by orienting the reader with basic legal profession concepts, such as the lawyer’s duties of confidentiality, communication, competence, and diligence.⁹

Part II introduces several illustrative examples of AI in contract drafting and negotiation that pose unique questions about the key differences between human and AI-driven contracting. These differences make it difficult to apply existing contract law to AI and raise important concerns about AI’s potential to discriminate when contracting and negotiating on behalf of different clients.¹⁰ Part III of this Note expands upon AI’s usurpation of traditional contract law principles. Fundamental contract law concepts, such as the “meeting of the minds” required to form a valid contract, do not readily apply to wholly AI-driven contracting.¹¹ Principally, AI’s application in contract drafting and negotiation can present novel complications when determining whether or not the parties to a contract mutually agree on its terms. These issues persist regardless of whether a party performs some of its obligations under an AI-driven contract and despite the controversial doctrine of constructive assent.

Part IV covers the equity concerns that arise when applying AI technology to contracting. In general, applications of AI technology in the contracting space raise concerns about “algorithmic discrimination”—AI’s tendency to produce discriminatory outputs as a consequence of being trained on tainted data.¹² AI in contracting also raises ethical issues regarding enforcement of fully automated contracts. A pervasive issue in the AI space is ensuring proper alignment between an AI model’s goals and those of its operator.¹³ Given that AI technology regularly suffers from misalignment problems, would it be ethical and equitable to enforce contracts drafted by these models? Another ethical dilemma that arises in the AI contracting context concerns legal liability and accountability if a party is injured by an AI-formulated contract. If harm results from an AI-drafted contract, who should be held accountable for these harms? Between the AI model itself, its designer, its user, and other parties, there is no readily apparent answer. Finally, the implementation of AI in contracting—a setting that involves a plethora of sensitive information—presents serious data privacy and security concerns.¹⁴

In Part V, this Note reviews the accuracy issues apparent in current and potential applications of AI technology. Simply put, AI technology can behave unpredictably and output inaccurate results known as “hallucinations.”¹⁵ In the litigation context, several lawyers, including Michael Cohen’s attorney, have recently been sanctioned or publicly admonished for citing fabricated cases generated by ChatGPT in their filings.¹⁶ In the contracting space, in which exact language and minor details can govern the legal meaning of an agreement, AI’s tendency to hallucinate can cause major problems.

Part VI presents the challenges to the legal profession that arise when using AI technology in contract drafting and negotiation. For example, overreliance on AI technology to draft and negotiate contracts may violate an attorney’s professional duties of competence and diligence—much like the actions of the lawyers who cited fabricated cases in their court filings. Overreliance may also violate an attorney’s professional duty of communication if they cannot explain their reasoning for a recommended course of action to a client due to reliance on ChatGPT in their decision-making. Additionally, since AI models operate as “black boxes,” their use may raise concerns about duty of confidentiality violations if client information is input into these systems without proper safeguards.¹⁷

Part VII discusses the empirical findings that resulted when the author “hired” ChatGPT to assist various types of fictitious clients with negotiating a standard commercial real estate lease. These research findings suggest that ChatGPT discriminates against individual clients by tending to recommend renegotiation less often and to a smaller degree when advising individual clients than when assisting corporate or nonprofit clients. These findings have immense equity implications for contract drafting and negotiation in an AI-driven world, as AI models that disfavor individual clients may exacerbate existing market power or resource inequalities between individuals and more sophisticated corporate or nonprofit clients.¹⁸ Finally, Part VIII discusses some strengths and potentially useful applications of AI technology in legal work in light of this Note’s theoretical discussion and empirical findings. Part VIII posits that, although AI technology excels at summarization,¹⁹ concerns about its ability to exercise discretion and judgment suggest that it may be best suited for administrative tasks.

I. A CRASH COURSE IN AI AND RELEVANT LEGAL THOUGHT

A. What Is Artificial Intelligence and How Can It Contract?

There is no widely accepted definition of what constitutes artificial intelligence, which is partially a byproduct of how technological capabilities have rapidly improved in recent years.²⁰ To oversimplify, computer programs were historically classified as artificial intelligence if they successfully mimicked human rational thought.²¹ An early example of this concept is the Turing test for artificial intelligence, which was developed by the “father of modern computer science,” mathematician Alan Turing.²² The Turing test assesses how well a machine can imitate human thought and behavior via a competition that Turing called the “Imitation Game.”²³ In the game, a machine and human compete by answering questions asked by a human interrogator; at the end of the game, the interrogator must identify which competitor is a human and which is a machine.²⁴ If the interrogator gets it wrong—i.e., says that the machine is the human—then the machine is thought to demonstrate human-level thought and intelligence.²⁵

This Note utilizes a relatively expansive definition of artificial intelligence that is reminiscent of the Turing test. For the purposes of this Note, artificial intelligence is any computer software program that demonstrates human-like behavior or intelligence. As discussed below, the focal point of artificial intelligence in this Note is large language models, which are some of the best modern examples of AI that would likely pass Turing’s test for artificial intelligence, given their language-based design and applications.²⁶

Artificial Intelligence’s Rise to Prominence: The “AI Boom”²⁷

Artificial intelligence has taken the public consciousness by storm since the release of ChatGPT, OpenAI’s text-generating chatbot, in November 2022.²⁸ ChatGPT is an AI model trained to engage in natural language conversations, which means that when users interact with ChatGPT, it converses with them by generating textual responses comparable to that of a human.²⁹ The model’s successful imitation of human-sounding speech captured the public’s imagination,³⁰ prompting increased interest in potential applications of AI technologies from the general public³¹ and software developers³² alike.

ChatGPT can complete a variety of academic tasks in a matter of seconds, such as writing essays, generating ideas, and answering mathematical problems.³³ It is no surprise, then, that students from primary school to collegiate grade levels were some of the model’s most prevalent initial users, asking ChatGPT to write papers and complete homework assignments on their behalf.³⁴ Students’ widespread use of ChatGPT to complete assignments led many schools and universities to initially ban the AI model altogether,³⁵ although it was difficult, if not impossible, to enforce AI bans—especially outside of the classroom.³⁶ A new industry of tools meant to detect the use of AI in students’ writing emerged to combat this issue, but their accuracy remains widely disputed.³⁷

Although initial widespread applications of ChatGPT were somewhat rudimentary in nature, such as students’ use of the tool to complete assignments,³⁸ OpenAI’s introduction of the model to the public sphere was instrumental in prompting other AI developers to invest in the creation and public release of their own large language models (“LLMs”).³⁹ After witnessing OpenAI’s successful launch of ChatGPT, prominent tech industry leaders such as Google and Meta immediately sought to turn AI technologies into tangible, profitable products that they could sell to individuals and companies.⁴⁰ Although these major technology companies had already been developing (and, in some cases, even released, to little success⁴¹) their own AI technologies before November 2022, ChatGPT’s successful public launch prompted an expansion of the AI industry like never before.⁴² By the following spring, a flurry of new LLMs had emerged on the market: Meta’s LLaMA model, Google’s PaLM-E, and even OpenAI’s newest iteration of its LLM: GPT-4.⁴³

In essence, large language models are AI models designed to interact with and produce language.⁴⁴ “Large” refers to the increasing trend to train these models on large quantities of data stored in massive data sets that are usually housed in collocated data centers.⁴⁵ While ChatGPT, LLaMA, PaLM-E, and GPT-4 are all generally considered LLMs, much like AI more broadly, a concrete definition of what constitutes a large language model remains an open question.⁴⁶ There are no exact parameters for how large an AI model must be or how it must interact with language in order to be categorized as an LLM.⁴⁷

On the other hand, LLMs are generally considered to be a subset of generative AI.⁴⁸ Generative AI is defined as artificial intelligence capable of producing new creations, such as graphic images, text, and audio, based on training data inputted into the model.⁴⁹ Therefore, generative AI enables a user to generate substantial quantities of work product with minimal effort by prompting a generative AI model and letting it create content for them based on the query. This is partly why ChatGPT became wildly popular in a short period of time⁵⁰—and why the generative model caused concerns about students using it to complete homework and other assignments on their behalf.

Beyond their avocational applications as homework helpers⁵¹ and joke writers,⁵² LLMs are being increasingly used by industry professionals to improve and expand the potential of their products and services.⁵³ For instance, Amazon Web Services implemented an externally facing AI chatbot on its Amazon.com retail site designed to handle returns, provide shipment tracking information, and generally improve the site’s customer service capabilities⁵⁴ (albeit the chatbot has garnered mixed reviews⁵⁵). Similarly, in 2024, Target Corporation launched an internally facing generative AI model, called Store Companion, to assist with employee training, store operations management, and general problem-solving tasks.⁵⁶ Meanwhile, social media platforms such as Instagram use AI models to filter content and craft feeds that are better personalized to users’ individual preferences.⁵⁷

Early Applications of Artificial Intelligence to Legal Contracting

Naturally, the ever-increasing implementation of LLMs in a variety of businesses, industries, and settings includes applications in the legal field as well.⁵⁸ For example, AI has already been used to create legal workflow companions with suites of legal skills,⁵⁹ contract lifecycle management software programs,⁶⁰ and contract redlining and drafting assistants.⁶¹ A simple Google search for AI contracting services yields a plethora of (interestingly named) AI-powered software programs that purport to assist an attorney with redlining (e.g., Harvey,⁶² Lawgeex,⁶³ Superlegal,⁶⁴ Ivo,⁶⁵ Screens,⁶⁶ and Spellbook⁶⁷) or managing (e.g., Evisort,⁶⁸ Ironclad,⁶⁹ Sirion,⁷⁰ and LegalSifter⁷¹) their legal contracts. Even companies that operate widely used legal research databases, such as LexisNexis and Thomson Reuters, have created and marketed their own generative AI-powered legal assistants.⁷²

Legal professionals are generally excited about new and potential future applications of AI to the legal world.⁷³ Many believe the technology will increase efficiency in a time-intensive industry by synthesizing documents and reducing the time a human attorney needs in order to perform certain legal tasks.⁷⁴ Some hopefuls even view AI as infallible—capable of outperforming humans, whose work is prone to errors, because AI can craft perfectly completed and accurate work product.⁷⁵ Finally, AI is thought by some to make legal services more affordable and accessible to the general public⁷⁶ by reducing the number of billable hours an attorney must dedicate to any given task, enabling individuals to access legal services without hiring a human attorney, or both. In fact, Utah and Arizona have already implemented pilot programs that allow non-lawyer entities, such as AI chatbots, to provide legal services, and Washington may be the next state to institute such a program.⁷⁷

Despite this enthusiasm about AI, the immediate application of LLMs to the legal space has not been without its challenges. Some attorneys have wrongfully used LLMs to shirk their responsibilities by asking AI models to conduct legal research or write briefs on their behalf.⁷⁸ This practice has resulted in massive sanctions and fines for attorneys who cited “bogus” cases that were fabricated by ChatGPT in documents that they later submitted to a judge.⁷⁹ Furthermore, as discussed later in this Note, issues regarding lawyers’ ethical and professional duties, algorithmic discrimination, AI’s inaccuracies, and the subversion of traditional contract law principles also arise when large language models are applied to the legal field.

B. A “Meeting of the Minds” Regarding Contract Law Theory

An orientation into the foundational principles underlying contract law theory is needed before one can take a proper deep dive into the applications of AI in contracting. A great place to start is the traditional contractual theory of mutual assent, colloquially known as the “meeting of the minds.”⁸⁰ Mutual assent is one of many requirements that must be demonstrated for a court to hold that a given contract is legally valid and enforceable.⁸¹ “Meeting of the minds” refers to the idea that both parties must mutually agree to the terms of a contract in order for the agreement to be legally binding.⁸² That is, the parties’ minds must, in a sense, “meet in the middle” at the moment when the contract is formed. For that reason, mutual assent may not be found when one or both of the parties to a contract entered into the agreement based on a misunderstanding or a mistake of law or fact.⁸³ Intuitively, this makes sense; it would not be good public policy to bind people to a contractual agreement if they did not fully understand the obligations and consequences they allegedly agreed to when the agreement was executed. Beyond equity justifications, it may also be inefficient to hold a party accountable for obligations that they did not intend to undertake and may not be equipped to fulfill. Relatedly, to create a binding agreement, the parties to the contract must specifically mutually assent to the material terms of the contract.⁸⁴ Without a “meeting of the minds” between the parties to any given contract regarding the essential provisions of the agreement, the contract is invalid and not legally binding on the parties.

In some instances, courts have imputed assent to a party based on their conduct even if they did not explicitly agree to or approve of the terms of an agreement.⁸⁵ This doctrine is known as “constructive assent,”⁸⁶ and it is common among online transactions.⁸⁷ For example, if a user of an online webpage affirmatively acknowledges the page’s terms of use by clicking an “I accept” or “I agree” button without actually reading the agreement, the user is usually found to have constructively assented to the terms of the agreement despite not actually being aware of its contents.⁸⁸

Although many people make light of the fact that nobody ever reads various websites’ terms of use or, more notably, Apple’s Terms and Conditions,⁸⁹ constructive assent is no laughing matter. In these types of situations, constructive assent can be used to essentially waive the traditional contract theory requirement of a “meeting of the minds,” instead holding individuals accountable for the contracts that they sign even if they do not fully understand or have knowledge of the terms that they allegedly agreed to.⁹⁰ Unsurprisingly, the doctrine of constructive assent is controversial—especially its application to consumer contracts⁹¹ and form contracts more broadly.⁹² Further, the ethics of constructive assent are hotly debated among scholars, with some arguing that applying constructive assent to a contested contract unfairly disadvantages the weaker party (e.g., the consumer) to the benefit of the dominant party (e.g., the retailer) whose greater market power enables them to force the weaker party to consent to the dominant party’s preferred terms.⁹³

C. Attorneys as Ethical and Professional Fiduciaries

Another important factor to consider when analyzing the potential applications of AI to the contracting space is the ethical and professional complications that arise due to attorneys’ special fiduciary duties to their clients. In general, attorneys are held to a higher standard than those who work in many other professions.⁹⁴ Specifically, attorney conduct is governed by each state’s bar association, many of which have adopted the Model Rules of Professional Conduct—the generic rules promulgated by the American Bar Association.⁹⁵ The Model Rules serve as a fundamental guideline for attorney conduct by prescribing various professional and fiduciary duties to attorneys, such as client confidentiality, competence, diligence, and communication.⁹⁶ The Model Rules also address various topics relating to an attorney’s practice—like conflicts of interest, the formation of an attorney-client relationship, the scope of one’s representation, and how to interact with unrepresented persons⁹⁷—and explain how model attorneys should approach these issues. Importantly, the Model Rules detail practices that constitute misconduct, like engaging in dishonesty or fraud, violating the Model Rules of Professional Conduct, or committing a criminal act.⁹⁸ For the purposes of this Note, it is important for one to keep the Model Rules of Professional Conduct in mind when considering how an attorney may use AI technology in drafting or negotiating contracts, as certain applications of AI may subvert the underlying goals that the Model Rules were designed to support in more traditional applications.

II. ILLUSTRATIVE EXAMPLES

Several ethical, practical, and theoretical questions arise when one considers various applications of AI to contract drafting, formation, and negotiation. To better illustrate the issues that arise from applying AI to the contracting space, consider the following numbered examples and the questions they raise regarding their implications for the contract law principles and legal profession concepts that we have discussed:

Example #1: Laypeople Using AI to Draft a Contract⁹⁹

Two laypeople (i.e., not attorneys) are doing business together. Interested in summarizing their deal in a written form, they “draft” a contract by asking ChatGPT to do so for them. Once ChatGPT has drafted the contract, the two parties both read and sign the contract, despite not understanding the agreement’s legalese or terms. Later, something goes wrong, and the contract’s validity and enforceability are disputed.

Was there a “meeting of the minds,” or mutual assent, here?

Is this a case of AI-assisted human contracting, or was this effectively an entirely AI-created contract?

Is the contract enforceable?

Should society want the contract to be enforceable?

Example #2: AI as a Contract Drafting Tool for Attorneys¹⁰⁰

As is industry practice, a lawyer in a corporate law firm normally uses a standard form contract from prior deals as a starting point when drafting new contracts. However, for a particular deal, she decides to use ChatGPT to draft the initial form contract instead.

Is this an example of AI as a tool that assists humans in contract drafting, or is this a wholly AI-drafted agreement?

Does this distinction have important implications for the contract’s validity and enforceability?

Is there any significant difference between this attorney using AI to create a form contract or pulling a precedent contract out of her firm’s database?

Would this amount to a breach of the attorney’s professional duties of competence, diligence, or anything else?

Example #3: Human Error Versus AI-Drafted Terms

Overwhelmed with his busy workload, a lawyer mistakenly inserts a clause in a contract he is drafting for his client. Both his client and the other party to the contract sign the agreement; neither party nor the attorney knows at the time the agreement is executed that the accidental provision is included in the contract.

Is the extra provision in the agreement enforceable (i.e., did the parties mutually assent to the term)?

Is this scenario any different from if AI completely drafts and executes a contract without humans involved in the contracting process?

How are these two examples reconciled in terms of mutual assent? Are they the same, or fundamentally different in any way?

Example #4: AI Automatically “Agreeing” to Online Terms

Annoyed with websites’ many Terms of Service and Cookies pop-ups, an inventor creates an AI-driven “ad blocker” software that automatically clicks through and “agrees” to these pop-ups on the software user’s behalf so that they never have to see them again.

Would this constitute the user’s assent to various websites’ Terms of Service?

Does the answer to this question depend on how long the user has had the software, or whether they knew or reasonably should have known that specific websites had Terms of Service or Cookies pop-ups?

* * *

There are two possibilities when applying AI technology to contract drafting and negotiation: (1) AI effectively functions as an assistant, aiding humans with their contracting, and (2) fully automated decision-making, in which AI completely takes over contracting, from start to finish, with no humans involved in the process. Under either scenario, four categories of problems arise when implementing AI in contract drafting and negotiation: the subversion of contract law principles, equity concerns, accuracy issues, and legal profession challenges.

III. AI’S SUBVERSION OF CONTRACT LAW PRINCIPLES

If AI functions as a mere contract drafting and negotiation assistant, mutual assent concepts would apply in the same manner that they do for purely human-conducted contracting. An underlying principle of the mutual assent requirement for a valid contract is the notion that the parties to a given contract must understand the terms of the agreement and have a “meeting of the minds,” or mutual agreement, that they find the terms acceptable.¹⁰¹ If AI technology merely assists an attorney with drafting or negotiating a contract, this does not affect the portion of the dealmaking process that mutual assent concerns. The only point in time that is relevant for mutual assent is when the parties come to a consensus that the contract’s terms are agreeable and subsequently execute the agreement.¹⁰² By that point in time, the drafting and negotiating phases of the process are complete (and, truthfully, long gone)—the agreement is in its final drafted form and will not undergo further redlines or revisions. Thus, the implementation of AI as a mere assistant in the contracting and negotiation process is not within the timeline or contextual scope that mutual assent concerns. AI’s use as a contracting assistant is therefore akin to any personal opinions the drafting attorney may have (outside of their thoughts and duties as a fiduciary of their client) regarding the deal at hand—i.e., irrelevant to questions about mutual assent.

While some may argue that the cyclical drafting, redlining, and negotiation process drives the parties to a contract toward the ultimate goal of mutual assent at the end of the contracting cycle, it is not a necessary component of mutual assent that agreements are modified and negotiated by the parties. If one party presents a complete agreement to another party, who signs it without criticizing its contents or insisting on revisions, it is still a valid contract. Furthermore, in many instances, an attorney drafts and negotiates on behalf of their client, who signs the final contract without a comprehensive legal understanding of the negotiations and redlines that were made during the dealmaking process. This is arguably like Example #1 in Part II, in which the two laypeople used AI to draft a contract that they then signed. Although the individuals did not negotiate between themselves, mutual assent was arguably satisfied because the humans—not ChatGPT—assented to the agreement at the end of the contracting process.

On the other hand, if contracting is entirely managed by AI—without humans involved in the process—then the contract law requirement of mutual assent is not satisfied. Arguably, if the laypeople in Example #1 did not understand the contract because ChatGPT performed a substantial portion of the legal lift for them (which is possible, considering that they did not understand the AI-drafted agreement’s legalese or terms), then the mutual assent requirement may not be satisfied because the contracting process was effectively completed without human involvement. Example #4 details a more abstract example of this concept. In Example #4, the inventor’s software “agrees” to websites’ terms of use on its users’ behalf. In this situation, the human user never sees, let alone reads, the terms of service that they allegedly agreed to through the AI-driven software. Although some might argue that there is mutual assent because a person who installs the software knows that it will “agree to” the terms on any site that the person visits, this argument does not hold up to pragmatic scrutiny. Given how often and extensively people surf the Internet, it is highly likely that, over time, the person would not know which websites had pop-up advertisements or terms of use that the AI bot “agreed” to on their behalf, let alone the content of those agreements.

Therefore, the contract law requirement of mutual assent goes unsatisfied when AI fully takes over the contracting process. This flaw in solely AI-executed contracting becomes even more apparent when considering contracts that involve multimillion- or multibillion-dollar transactions, fundamental changes in a company’s structure or dealings, or changing the client’s financial or business practices in any substantial way. Without providing notice of these changes to the client and securing their informed assent to new and material contractual terms, solely AI-driven contracting is unlikely to satisfy traditional contract law principles.

Some might argue that a party’s performance of its obligations under a fully AI-driven contract would justify its validity and waive the mutual assent requirement, much like the traditional contract law enforcement principles surrounding the Statute of Frauds.¹⁰³ However, a fully automated contracting process differs from classic applications of the Statute of Frauds—such as when a party denies a prior verbal agreement, claiming that they never agreed to the deal because no written proof of it exists.¹⁰⁴ Rather, if AI completely drives the contracting process, then the parties to a contract would likely never be aware of, let alone read, the AI-drafted and executed agreement. Due to this disconnection, it is highly unlikely that the parties would completely perform their obligations under the agreement—simply because they would not know what their obligations are. Even if the parties were generally aware of their performance obligations (e.g., because the AI model contracted an extension of an existing purchase agreement between a purchaser and supplier), they would still not know the specifications of the agreement to a high enough degree for public policy to justify holding them to the transaction.

Furthermore, although some may argue that the doctrine of constructive assent can waive the mutual assent requirement in the purely AI-driven contracting setting, this argument is specious. Constructive assent is a highly controversial doctrine in its current limited uses, such as form contracts.¹⁰⁵ Scholars have raised particular concerns about constructive assent eliminating the need for mutual assent in online transactions, such as clickwrap agreements,¹⁰⁶ because the doctrine can infer an Internet user’s assent from their decision to click “I agree”—regardless of how “ill-informed and not well considered” that decision might have been.¹⁰⁷ Therefore, because constructive assent is thought by many to subvert traditional contract law theory, especially in online transactions, it provides a weak justification for waiving the mutual assent requirement in a purely AI-driven contracting setting.

Therefore, the distinction between AI as a contracting assistant and wholly AI-driven contracting carries significant contract law implications. In Example #2 in Part II, the legal difference between an attorney using a precedent contract from prior deals and relying on an AI-generated form contract is crucial, even though practicing attorneys may see little to no practical difference between the two. As AI technology continues to advance, the line between human-driven and AI-driven contracting will increasingly blur, raising questions about contract validity, enforceability, and an attorney’s professional obligations. Whether AI serves merely as a drafting tool or takes on a more autonomous role could have far-reaching legal consequences.

IV. EQUITY CONCERNS

A. Algorithmic Discrimination

Algorithmic discrimination occurs when ostensibly impartial AI technology produces discriminatory results because it was trained on tainted inputs.¹⁰⁸ Put more simply, algorithmic discrimination is a perfect example of “Garbage In, Garbage Out.”¹⁰⁹ Proponents of AI argue that even if algorithmic discrimination occurs, automated decision-making is preferable to human decision-making because humans are biased.¹¹⁰ However, algorithmic discrimination can perpetuate and amplify existing biases or stereotypes in an AI model’s training data, with the dangerous added implication that the tainted model appears facially objective and neutral.¹¹¹ Furthermore, because of their reliance on human inputs, algorithms will arguably never be fully bias-free and nondiscriminatory, but perpetually flawed as “partially human.”¹¹² Additionally, due to its highly advanced pattern-detection abilities, AI technology has the potential to develop new forms of discrimination by extracting patterns from its inputted data that humans alone would not have been able to detect.¹¹³

Algorithmic discrimination is also concerning because current legal theories do not supply satisfactory remedies for discrimination by AI systems.¹¹⁴ For example, imagine that an online job search site, such as LinkedIn, uses an AI-driven algorithm to “match” employers with potential interview candidates on the site by recommending certain user profiles to employers.¹¹⁵ If a user believed that the algorithm discriminated against them in choosing not to suggest their profile to employers, they would have limited options to seek legal redress. In the employment space, discrimination claims are separated into two categories: (1) disparate treatment and (2) disparate impact.¹¹⁶ Disparate treatment is focused on combating explicit discrimination, which requires a finding of intent.¹¹⁷ In a traditional, non-AI setting, explicit discrimination may be demonstrated by a qualified job candidate who was denied employment by a firm that refused to hire her by proving that the refusal was based on one of the candidate’s protected characteristics, such as race or gender.¹¹⁸ Conversely, to claim disparate treatment in the case of an AI algorithm, the disgruntled LinkedIn user would have to demonstrate that the algorithm had the intent to discriminate, which may be incredibly difficult, if not impossible, to prove in the case of a nonhuman entity. Thus, algorithmic discrimination is likely thought to be a product of unintentional or incidental discrimination.

Alternatively, disparate impact claims do not require the plaintiff to prove discriminatory intent;¹¹⁹ rather, the doctrine considers whether there is a disparate impact on members of a protected class, any business necessity for the impact, and a less discriminatory alternative means of achieving the same result.¹²⁰ Therefore, given the aforementioned difficulty of ascribing any particular cognitive motivations to an AI model, disparate impact discrimination is the only potential mode of existing discrimination law that

might provide legal redress for members of protected classes who experience algorithmic discrimination in the employment context.

In the contracting space, algorithmic discrimination has the potential to create disastrous consequences. If an AI model is trained on discriminatory data or its algorithm is improperly weighted by its human developers, it may tend to favor one type of party over another, such as men over women.¹²¹ This bias may then prompt the AI model to negotiate more favorable deals for certain parties than it would for others. This potential for AI to act as a discriminatory advocate may exacerbate existing inequalities, especially if the model’s reliance on tainted training data causes it to reinforce biases that disproportionately harm certain groups. Particularly sensitive communities include women, racial or ethnic minorities, and people who are socioeconomically disadvantaged. In the contracting setting, where every word in a contract has an important implication for the meaning of the agreement, a tainted AI model could selectively include unfavorable terms—or simply choose terms that are not the most favorable—in an agreement when “hired” by a party that the model’s data disfavors. The individual who experiences discrimination by receiving the “short end of the stick,” or undesirable contract terms, would likely never know that they were discriminated against by the model they used to contract. Even if the disadvantaged individual later became aware of the discriminatory term selection, it is likely that they would not have the ability or resources to advocate for themselves.

Furthermore, the contracting setting presents a multitude of consequential and important situations in which a person’s livelihood depends on the degree of favorability they are able to negotiate for themselves in a given contract. For example, in an employment contract, the starting salary, amount of paid family leave, and inclusion of any noncompete provisions may have huge implications for a prospective employee’s financial stability and future wellbeing. If an AI model poorly negotiates on a potential employee’s behalf, that potential employee may experience a lower quality of life than they would have otherwise—and if the reason for AI’s poor performance is discriminatory conduct, these disadvantaged outcomes will only exacerbate existing inequalities in our society.

B. Ethics of Enforcing Automated Deals

Another serious concern that arises when using AI in contracting is the ethical dilemma of deciding when to enforce completely automated deals. If we get to the point in which contracting is an entirely AI-driven task, do we feel comfortable holding humans accountable for the deals that an AI model entered into on their behalf?

A critical consideration when determining accountability in this circumstance is AI (mis)alignment. Broadly speaking, direct alignment refers to the ability to program an AI system so that it pursues goals consistent with the goals of its operator.¹²² There are a plethora of difficulties in ensuring proper direct alignment, including (1) determining the operator’s goals, (2) conveying those goals to the AI software, and (3) getting the AI model to correctly translate those goals into actions.¹²³ It is often incredibly difficult for an AI user to overcome these challenges, and efforts to do so sometimes cause AI programs to take unexpected actions that result in adverse consequences.¹²⁴

In the contracting context, holding the user of an AI contracting software to an agreement that the AI model drafted on their behalf can have especially inequitable consequences. Much like Example #3 in Part II, in which the human attorney mistakenly added language to the contract he was drafting, if an AI program is misaligned with its user’s goals, then it may draft contracts that do not reflect those goals. Both general intuition and contract law theory suggest that in a scenario like Example #3, the parties to the contract should not be bound by terms to which they did not assent. Similarly, in the case of misaligned AI contracting software, intuition suggests that it would be unethical to bind a party to an agreement if the AI model that contracted on their behalf did so in a manner that did not align with the user’s intentions.

C. Who Is Liable or Accountable?

If and when AI-assisted or wholly automated contracting goes wrong, who should we hold liable for breached contracts? Would we want to differentiate between the AI developer, the human who “hired” the AI to contract on their behalf or otherwise used the model to contract, and the AI model itself?

These questions are especially difficult to answer because traditional liability frameworks are designed with an inherent assumption that a human decisionmaker caused the alleged harm.¹²⁵ In the contracting setting, we would hold this human decisionmaker accountable for their breach of a contractual promise. If AI functions as a contracting agent, however, a human may not have made decisions that directly caused the complaining party’s harm. If an AI contracting program enters into agreements on a human’s behalf, that may not be enough under traditional liability frameworks to justifiably say that the human caused the alleged harm and hold them liable for it.

For similar reasons, it also appears unreasonable to hold an AI developer liable for breaches of contracts that its AI contracting software simply aided in drafting. To oversimplify, in order to prove causation of harm due to a breached contract, a plaintiff must demonstrate that the defendant’s breach was more than just an actual cause of the plaintiff’s harm.¹²⁶ Rather, the plaintiff has a higher burden: they must prove that the defendant’s act was the proximate cause of their harm.¹²⁷ To demonstrate proximate cause, the plaintiff must show that the harm was a foreseeable consequence of the defendant’s breach of contract.¹²⁸ In the AI context, a developer and its AI software may be actual, or but-for, causes of the harm suffered by a party who contracts with the software. However, the broad applicability of AI contracting software and its limitless potential uses suggest that, in many cases, the developer’s creation of the software would not be the legal, or proximate, cause of the injury because the alleged harm was not foreseeable.

Given these uncertainties about holding either the user or developer of AI-driven contracting software accountable, a plaintiff’s final potential avenue in a breach of contract claim might involve asserting that the AI program itself is liable for the harm. However, while holding the contracting algorithm liable may initially appear to be a plausible approach, it poses two serious concerns.

First, there is no legal precedent for holding a completely nonhuman entity liable for a person’s harm. Although corporations have been found liable for various harms, they are not analogous to AI-powered software programs. As “legal fictions,” corporations achieve legal personhood by “acting” through the actions of their human agents (that is, their officers, directors, promoters, and employees).¹²⁹ AI contractors differ significantly from corporations and operate in an almost entirely opposite manner. Instead of operating through human agents, AI software operates on behalf of humans. As a result, efforts to attribute liability to AI software by drawing analogies to corporate liability may be both inaccurate and misguided.

Second, if an AI model is held liable for contract breaches and required to pay damages to compensate for the resulting harms, this could expose AI software developers to above average or substantial levels of risk.¹³⁰ This increased risk may discourage AI developers from investing in further innovation, fearing that their investments could be lost to breach of contract, product liability, or other lawsuits. Additionally, if AI companies or algorithms were exposed to liability in this way, potential entrants to the AI contracting industry might hesitate, hindering further technological advancements. This suppression of innovation could cause greater harm to society than that posed by the inability of those alleging harm from breached contracts to obtain damages.

Thus, preserving innovation and investment into AI technology and its legal applications may involve specially protecting AI software, its users, and its developers from liability for harm-causing AI contracts—or, at the very minimum, maintaining existing standards of proof that prevent plaintiff-victims with lower socioeconomic statuses from securing damages in these types of cases.¹³¹ Under the current legal framework, only those individuals with higher socioeconomic statuses would be able to secure the costly expert testimony needed to demonstrate that an AI’s contract drafting did not satisfy the standard cost-benefit analysis used in determining liability in product warning, instruction, or design liability cases.¹³² Lowering the burden of proof would combat this issue, but such a change is unlikely to occur as it would expose AI software, its developers, and its users to substantial liability due to the highly unpredictable nature of AI-created risks.¹³³ Although there are numerous instances in recent history when the American public has accepted negative consequences for a minority group to achieve broader benefits for society as a whole,¹³⁴ the benefits of AI contracting do not outweigh its disproportionate harms.

Another issue in the context of assigning liability for AI contracting-related harms is allocating fault between the multiple parties that were involved in the contract’s creation and implementation. Parsing out which party should be held liable—whether it be the AI software itself, its designer, seller, or user, or another party altogether—inherently includes a significant policy decision as to how society chooses to (dis)incentivize AI technology’s development, usage, and applications.¹³⁵

D. Data Privacy and Security Concerns

When you log into ChatGPT to ask it a question, the prompt that you send the model does not stay on your laptop. It does not even stay on ChatGPT’s webpage.¹³⁶ By the time your query has been answered by the LLM (which is within seconds), your information is long gone—out into the ether of wherever OpenAI stores the many gigabytes of data it uses to train its AI models.¹³⁷ In reality, the information likely ends up in a remotely located and highly classified data center, where it sits on a server until OpenAI uses it to train its next LLM.¹³⁸

The average person may not care that their question asking ChatGPT to craft a new diet for them may get stored somewhere.¹³⁹ However, sophisticated legal clients commonly include their proprietary information—such as property addresses, purchase prices, and highly technical engineering or software information—in high-level contracts. Thus, legal clients are typically very protective of the private information in their contracts and subsequently include confidentiality clauses in their agreements to safeguard against disclosure to third parties.¹⁴⁰

For cases in which legal clients have highly sensitive information, AI’s “black box” can become a major issue. The “black box” problem refers to the fact that we are unable to see how LLMs make their decisions.¹⁴¹ Although the inputs and outputs of LLMs are observable, given the algorithms’ ever-evolving nature, their internal workings are a mystery—including what input data they retain.¹⁴² AI models’ mysterious inner workings may interfere with the efficacy and implementation of AI in the contract redlining and negotiation space because legal clients who are protective of their proprietary information may object to an AI model’s use in the contracting process. Even if a law firm used an “internal” AI software program, clients with sensitive information may not be comfortable with such a program because their information would be stored within the firm’s model for perpetuity.

There is an inherent tension between training an LLM and protecting clients’ confidential information. LLM models are trained on inputted data—and they improve if provided with greater quantities of training data.¹⁴³ Therefore, without clients who are willing for their information to be input into an LLM, the model’s efficacy will not improve. This may create problematic incentives for law firms to encourage their clients to commingle their sensitive information with that of other clients in the firm’s AI model in order to produce a better-quality software program for the firm.

Finally, LLMs’ greatest skill is their ability to recognize patterns in data. With more and more sensitive client information inputted into and stored by an LLM, the potential for an AI model to identify connections between data increases. In the case of an outsourced AI model not owned by a law firm, these recognized patterns may be disclosed to third parties for nefarious purposes. For instance, an LLM may analyze contracting patterns to determine which companies are economically successful, leading a third party to misappropriate this information and engage in fraudulent or deceptive dealings. In a more alarming scenario, third parties who gain access to confidential company addresses or security details that an LLM extracted from contracts—such as the location of a technology company’s classified data center—could use this information to break into the facility and steal servers.

V. AI: ARTIFICIAL INTELLIGENCE OR ACCURACY ISSUES?

Artificial intelligence is widely known to “hallucinate,” or misinterpret patterns in its data and create inaccurate or nonsensical outputs.¹⁴⁴ When an LLM hallucinates, it can fabricate legal cases, contradict itself, or provide outright wrong answers to questions.¹⁴⁵ In the contracting space, minute missteps when negotiating or redlining an agreement can have enormous consequences.¹⁴⁶ Therefore, AI’s tendency to hallucinate presents a major barrier to its successful implementation as a contractor. Given its pattern recognition functionality, AI is also known to provide different answers to the same question if it is asked multiple times, with slightly different wording, or by different people. These inaccuracies and inconsistencies are unacceptable in a detail-oriented field such as contract law, where “the devil is in the details.”

Furthermore, there are currently no regulatory compliance standards that would require AI models to be regularly updated with new case law, statutes, and other sources of law. On the other hand, state bar associations require attorneys to remain knowledgeable about updates in the law and complete continuing legal education (“CLE”) courses.¹⁴⁷ The nonexistence of regulation that would mandate AI models to remain up to date on new laws presents major challenges in the contracting space. Just like an attorney who refuses to complete their CLEs, an AI model that is not fully updated on what the current law is cannot adequately contract or negotiate for a client. Even if regulations were eventually implemented that required regular updates to AI models so that they included new case law, statutes, and other laws, this would be difficult to administer. Since it would be incredibly difficult, if not impossible, for an AI model to be instantaneously updated as new laws came into effect, this time lapse means that these models will always be somewhat out of date and not fully updated on the newest laws. Additionally, such regulations, if they came into effect, would place immense compliance costs on AI developers to continually update their models and may even discourage certain developers from entering the legal contracting space altogether.

Finally, LLMs are not sufficiently accurate to be used in contracting because of their technical limitations. AI technology lacks the ability to exercise judgment and is known to struggle with customization, context, and complexity (“CCC”)¹⁴⁸—all of which are highly relevant aspects of contracting. In fact, CCC is a major reason in-house counsel as a general concept exists; businesses that are highly technical or complex in nature often prefer to have their own attorneys who are better suited than outside counsel to understand the company’s unique situation and needs. Thus, AI would not serve well as a legal assistant because it would not understand the context or complexity of a prospective client’s specific contracting needs.

VI. LEGAL PROFESSION CHALLENGES

As fiduciaries for their clients, lawyers are held to a high professional standard. Subsequently, lawyers’ use of AI technology poses unique challenges to the legal profession, particularly in the context of contract drafting and negotiation.

A compelling argument can be made that an attorney who relies on AI technology to draft contracts violates their professional duties of competence and diligence.¹⁴⁹ Although the AI-toting attorney may argue that an LLM is a tool that they use to aid their work, much like Microsoft Word or Excel, such an analogy is misplaced. Generative AI differs from these types of technologies because it allows lawyers to create substantive work product with minimal effort.¹⁵⁰ Therefore, relying on ChatGPT for contract drafting may undermine an attorney’s obligation to provide competent and diligent representation for their client.

Furthermore, an attorney’s reliance on AI technology to draft and negotiate contracts may create communication gaps between the attorney and their clients. If an attorney blindly accepts an LLM’s output as the best possible redline or negotiation strategy in a given situation, the attorney may be incapable of explaining to their client why they undertook the AI-suggested action.¹⁵¹ This blind acceptance of an AI model’s output is very likely if an attorney uses an AI model to contract because we often cannot look into an LLM’s inner workings or see why they generate the outputs that they do.¹⁵² The black box problem exacerbates this duty of communication issue if an AI model executes contracts without humans involved in the contract drafting and negotiation process, as the model would provide little to no legal reasoning to its client to explain its outputted action.

As mentioned in Section IV.D, serious duty of confidentiality concerns arise when clients’ data is input into an LLM.¹⁵³ Even if placeholder information is used in an effort to protect confidential client data, an AI model may be able to use its ability to detect patterns to extract confidential information from the provisions and context that are inputted into it. This is especially possible if an attorney or law firm inputs substantial amounts of client data into an AI model, as in the case of AI-driven contract lifecycle management programs or internal AI programs more broadly.

Finally, AI is not suited for the ethical and emotional dilemmas that are inherent in legal contracting and negotiation. Attorneys regularly encounter ethically and emotionally intense situations when negotiating and contracting for their clients. If an AI model is tasked with contracting in an ethically ambiguous situation, it would lack the human touch necessary to appropriately respond. Even if the model was trained to provide canned outputs in specific scenarios, it would be impossible for the model’s programmers to predict all potential ethical dilemmas that the AI model may encounter in practice. Additionally, in emotionally intense contracting settings, such as mergers and acquisitions, partnership agreements, or certain real estate transactions, clients are likely to value the human touch of an attorney over the detached and indifferent nature of an AI model.

VII. EMPIRICAL RESEARCH: “HIRING” CHATGPT IN A CONTRACT NEGOTIATION

To test AI’s current capabilities in the contract drafting and negotiation space, the author conducted novel empirical research using OpenAI’s Application Programming Interface (“API”). The experiment was designed to imitate “hiring” ChatGPT¹⁵⁴ as a legal assistant by tasking it to assist with a client’s negotiation of a commercial real estate lease. To investigate whether ChatGPT suggests different negotiation recommendations depending on its type of client, the author selected four general client types for this experiment: (1) an individual; (2) a small, privately held corporation; (3) a large, publicly held corporation; and (4) a nonprofit organization. ChatGPT was not provided with additional information about each client, and the rest of the experiment—including the exact prompt language, base contract structure, and output scale—was held constant across all client types in order to control for differences in the AI model’s responses.

A commercial real estate lease was selected for this experiment because all four of the selected client types could plausibly negotiate and enter into a commercial real estate lease as a tenant. To simulate a real-world commercial real estate contract, the author provided ChatGPT with thirty generic boilerplate provisions typically found in a commercial real estate lease, such as assignment, security deposit, renewal option, and maintenance provisions.¹⁵⁵ For each provision, the AI software was asked whether it would recommend renegotiation to its client. To facilitate objective comparisons between ChatGPT’s responses for different client types, the query solicited numerical responses by specifically asking ChatGPT to output its response on a scale from 0 to 100. On this scale, 0 indicated that ChatGPT would recommend to the client that the language was acceptable and should not be renegotiated, while 100 signified that ChatGPT would recommend that the language was unacceptable and the client should renegotiate the provision.¹⁵⁶ The 0 to 100 scale was chosen to prevent ChatGPT from outputting renegotiation advice in plain English. With numeric outputs, the author did not need to make subjective judgments about the quality of ChatGPT’s negotiation recommendations—which would have been necessary if they were in plain English—in order to compare the outputs across client types.

ChatGPT was selected as the AI chatbot for this experiment due to its popularity.¹⁵⁷ Because ChatGPT is pervasive, the results of an experiment utilizing it are more easily generalized to real-world applications and settings than the results of an experiment conducted with a less popular AI program. Put simply, the author chose to use ChatGPT for this research because this experiment seeks to replicate laypeople’s use of AI to negotiate contracts and laypeople are more likely to use ChatGPT than other AI programs.

The author also selected OpenAI’s API to conduct this experiment rather than prompting ChatGPT manually because the API provided an efficient and cost-effective method of testing the author’s algorithmic discrimination hypothesis.¹⁵⁸ In general, an API is a set of protocols that connects software programs, devices such as computers, and applications by enabling them to more easily communicate with each other.¹⁵⁹ APIs are useful because they enable a researcher to automate repetitive tasks such as scraping information from webpages or, in this case, prompting ChatGPT repetitively.¹⁶⁰

To conduct this experiment, the author drafted Python code that prompted ChatGPT for each client-provision pairing through its API and saved the AI model’s outputted numbers in an Excel file. Notably, iterating prompts through OpenAI’s API enabled the use of its log probabilities (“logprobs”) feature to construct more accurate data as compared with the data that would result from manual prompting.¹⁶¹ Logprobs is a feature in OpenAI’s API that responds to a particular prompt with both ChatGPT’s most likely outputs and the corresponding log probabilities for those responses.¹⁶² In essence, the logprobs feature enables a researcher to determine the estimated probability that ChatGPT would respond to any given prompt with particular responses.¹⁶³ For instance, in the context of this experiment, when ChatGPT is tasked with advising an individual client about whether to renegotiate the “Premises” provision of the provided lease agreement, the AI program is 78.629% likely to output “25,” 11.181% likely to output “50,” and 6.966% likely to output “75” on the 0 to 100 scale.¹⁶⁴

The logprobs feature allowed the author to construct a weighted response output for each inputted client-provision pairing that represents ChatGPT’s landscape of potential responses in a single number. The author created each client-provision prompt’s corresponding weighted response by utilizing the five most common responses for each prompt. For example, the mathematics behind the average weighted response when ChatGPT advises an individual client about the “Premises” provision of the lease is shown in Figure 1 and described below.

Figure 1. Weighted Response Calculation for Individual Client “Premises” Provision

First, each of the top five response values were multiplied by their corresponding probabilities, which were extracted from the log probabilities provided by OpenAI’s API. Then, these individually weighted values (shown in Figure 1 under the “Response × Probability” column) were summed. For the “Premises” provision and individual client prompt in Figure 1, this sum totaled approximately 31.095. Then, the individual probabilities of the five most likely outputs were summed; in Figure 1’s example, that total equaled approximately 0.9798, or 97.98%. This total conveys that approximately 97.98% of ChatGPT’s responses to this particular client-provision prompt were either 25, 50, 75, 20, or 85. Finally, the “Response × Probability” sum (approximately 31.095) was divided by the probability sum (approximately 0.9798) to calculate the weighted average response for this particular client-provision combination, or 31.73. Therefore, when ChatGPT is tasked with assisting an individual client and the provided provision of the lease agreement is the “Premises” provision, the AI program’s weighted average response is 31.73. Qualitatively, a result of 31.73 on the 0 to 100 scale facially suggests that ChatGPT may not be highly likely or enthusiastic to recommend to the individual that they should renegotiate this provision. However, the nature of this experiment was to derive comparisons between client types, so although the 31.73 value might suggest that ChatGPT is unlikely to be a zealous advocate,¹⁶⁵ this value must be compared with the AI program’s average weighted responses for other client types with the same “Premises” provision to be able to draw substantive conclusions about ChatGPT’s propensity to discriminate against certain types of legal clients.

As demonstrated above, this math derived a single numerical response for each client-provision pairing, facilitating objective comparisons between ChatGPT’s outputs when it is “hired” by different clients. The individual client’s average weighted response was used as a baseline measure by taking each non-individual client response and subtracting the corresponding individual response for the same lease provision to calculate a difference between the two values for each provision. Then, these difference calculations (one value for each provision of the lease agreement) were plotted. The visual representations of the differences between the average weighted responses for an individual client and a small corporation, large corporation, and nonprofit organization were constructed by plotting these differences on the following histogram plots.¹⁶⁶

Small Corporation Versus an Individual as a Client

Figure 2. Histogram of Differences in Average Weighted Responses Between a Small Corporation and an Individual Client

The histogram of differences between ChatGPT’s average weighted responses for a small corporation and those of an individual client demonstrates a few takeaways. First, the differences are clustered around zero, where zero indicates no numerical difference between ChatGPT’s responses when hired by either an individual or a small corporation. This finding suggests that, for the most part, ChatGPT treats individual and small

corporate clients similarly when tasked with advising them in a contract negotiation.

However, the histogram includes some instances of large differences between individual and small corporate responses, such as one provision where ChatGPT output a renegotiation suggestion for a small corporation that was over thirty points larger than the recommendation it provided the individual client. Notably, there were no instances of ChatGPT outputting a weighted response for the individual client that was greater than or equal to ten points higher than its corresponding small corporate output. On the other hand, there were multiple provisions where ChatGPT output renegotiation suggestions for small corporate clients that were ten or twenty points higher than the provision’s corresponding individual-client responses. These provisions, in addition to the rightward-skewed shape of the histogram in Figure 2, suggest that ChatGPT tends to recommend renegotiation for small corporate clients more often and to a greater extent than it does for individual clients.

Large Corporation Versus an Individual as a Client

Figure 3. Histogram of Differences in Average Weighted Responses Between a Large Corporation and an Individual

Figure 3, which shows the differences between ChatGPT’s responses for large corporate clients and individual clients, demonstrates similar patterns. Much like the small corporate client example in Figure 2, Figure 3 includes clustering around zero. This suggests that for a variety of provisions, ChatGPT will provide similar renegotiation recommendations for both individual and large corporate clients.

However, Figure 3 also includes the most dispersed results of the three client comparisons conducted in this experiment. The histogram includes a wide variety of difference values, most of which are relatively numerically different from one another—so different, in fact, that they fall into individual difference bins in Figure 3’s histogram. The dispersed nature of these results suggests that, while there is some clustering around zero, ChatGPT provides a wider range of negotiation recommendations when advising large corporate clients compared with other client types. This variability may indicate that ChatGPT’s training data assumes that large public corporations are more varied and complex than smaller, privately held corporations¹⁶⁷ and subsequently require a broader variety of negotiation advice or have greater market power to exert its will in a contract negotiation.¹⁶⁸ Additionally, the broader spread of the differences in responses for large corporate clients as compared with individual clients might also suggest that ChatGPT views large corporate clients as having more nuanced or varied negotiation capabilities and needs compared with individual clients.

Nonprofit Organization Versus an Individual as a Client

Figure 4. Histogram of Differences in Average Weighted Responses Between a Nonprofit Organization and Individual Client

Figure 4 visualizes the difference in weighted responses for a nonprofit organization as ChatGPT’s client as compared with an individual as its client. Here, we see the strongest clustering of results around zero of the three client comparisons studied in this experiment.¹⁶⁹ This suggests that, between corporations and nonprofit organizations, ChatGPT considers a nonprofit to be most analogous to an individual in the contracting space. This makes some intuitive sense if ChatGPT assumes that both individuals and nonprofit organizations tend to have less financial and political resources, market power, and influence over negotiations than large public or small private corporations.¹⁷⁰

However, despite this stronger clustering of differences around zero for nonprofit organizations, the histogram in Figure 4 continues to demonstrate the same trend seen for both corporation types: a rightward shift. This again suggests that ChatGPT favors nonprofit organizations over individuals in the negotiation space by more strongly or commonly recommending renegotiation to them, potentially because the model perceives individuals as having less power than nonprofit organizations to effectively negotiate for favorable provisions.

D. Overall Trends and Conclusions

Figure 5. Histogram of Differences in Average Weighted Responses Across All Four Client Types

Figure 5 is an overlay of the results from Figures 2, 3, and 4. Taken as a whole, while there is some clustering around zero, the rightward shift in the data demonstrates that ChatGPT tends to recommend renegotiation to (1) large, public corporations; (2) small, privately held corporations; and (3) nonprofit organizations more often and to a greater extent than it does when its client is an individual. Additionally, there are few occurrences of negative values on the combined histogram, which represent when ChatGPT outputted an individual client renegotiation value that was higher than the value outputted for any of the other client types for a given provision. Collectively, these trends suggest that ChatGPT may discriminate against individuals when “hired” to consult a contract negotiation by recommending

less favorable terms or negotiation strategies to an individual than it would to other types of clients.¹⁷¹

Interestingly, the minimum differences for the small corporation, large corporation, and nonprofit organization clients were -5.82, -8.42, and -5.36, respectively. These values represent the provisions for which ChatGPT most strongly recommended negotiation to an individual client as compared with other client types. Conversely, the maximum differences, which represent the instances when ChatGPT most strongly recommended the small corporation, large corporation, and nonprofit organization to negotiate as compared with an individual client, are significantly larger than the minimum differences. The maximum differences for the small corporation, large corporation, and nonprofit organization were 39.28, 22.68, and 29.43, respectively. Taken together with each client type’s mean differences (3.98, 2.99, and 3.71, respectively), this data demonstrates the systematic disadvantage in negotiation advising that individual clients experience compared with their corporate or nonprofit counterparts when using ChatGPT to assist in a contract negotiation.

E. Shortcomings

Although the findings of this empirical study are intriguing, there are some important caveats to note as well. First, the author chose to specifically use OpenAI’s GPT-4 Turbo model for this experiment, meaning that its results may not be readily generalizable to other OpenAI or AI models. Additionally, to best balance creativity with coherence, the author set the API’s temperature to 0.7. Temperature is a parameter value that controls how often ChatGPT outputs a less likely response; in essence, it is a measure of how random or creative the model’s responses are.¹⁷² The author initially tested the experiment with GPT-4 Turbo’s default temperature of 1 but ultimately tamped the parameter down to 0.7 in an effort to replicate the deterministic nature of legal advising.¹⁷³ The author also decided to use only the top five logprobs, rather than more, in conducting this analysis.¹⁷⁴ Both the temperature and top logprob decisions were made in an effort to replicate an individual user’s experience on ChatGPT while maintaining consistency across various API code executions.¹⁷⁵

Unfortunately, while these decisions were necessary to conduct the research, they also inherently shaped its results. Any modification of the temperature or number of requested logprobs alters ChatGPT’s renegotiation recommendations. Furthermore, this style of research does not easily facilitate demonstrating statistically significant findings—such as with a p-value used in traditional statistical analyses—because the model generates different outputs each time the code is run. As a result, these findings are not readily replicable, which is an unfortunate nature of conducting social science experimentation with the black boxes that are AI models.¹⁷⁶

Beyond technical limitations, other factors may impact the generalizability of this study’s findings. Only one type of contract, a lease agreement with thirty boilerplate provisions, was used in this research. Future scholars can expand upon this work by incorporating new and additional types of contracts and more detailed or varied provisions into this study’s framework to investigate if AI models discriminate against individuals when contracting in different contexts or with multiple types of contracts. Additionally, given that ChatGPT is a large language model, it is likely that the exact phrasing of the prompts used in this research impacted the model’s recommendations. Therefore, future scholarship can include a greater diversity of prompt language to determine if these findings hold across different prompting styles and approaches.

Similarly, additional research can incorporate more specific details about the AI model’s client when soliciting negotiation advice, whether in the contract itself or by expanding on the details included when contextualizing the prompt for the AI model. Inclusion of greater detail in a future study may determine if the use of specific company or individual names or other information results in similar algorithmic discrimination patterns. Greater contextualization is also more likely to align with real-world uses of AI modeling in contract negotiation, as the user would probably provide information about themself, the other party, and the deal at hand while soliciting assistance from an AI model.

Additionally, another version of this research might request AI’s assistance in renegotiating a contract that initially includes blatantly favorable (or unfavorable) provisions for the client. This arrangement may demonstrate different findings than an experiment conducted with relatively neutral starter provisions would, like those used here. The author intentionally used neutral lease provisions in this case to facilitate easier comparisons between client types and force ChatGPT to rely on its training data in making renegotiation recommendations rather than following an implicit suggestion to renegotiate provisions that are blatantly unfavorable (or vice versa).

Another alternative experiment design might use iterative follow-up prompts, rather than a single prompt, to solicit advice from the AI model because the language and structure of the prompt used to solicit advice may influence the AI model’s recommendations. For example, uploading a contract to ChatGPT and asking it a leading question such as “Should I negotiate Provision A?” may result in the AI model suggesting renegotiation more often or to a stronger degree than a broadly phrased prompt that asks ChatGPT what it thinks about the provision. Furthermore, this experiment used a numeric scale to gather ChatGPT’s outputs in a form that was easily and objectively comparable across client types. The 0 to 100 scale used in this Note’s empirical framework inherently assumes that this continuum is representative of the quality and strength of the renegotiation advice that ChatGPT would output in plain English to a real-world client. In real life, an AI model’s output would be substantive—it would tell the user in plain English what it thinks of the provision, whether or not to renegotiate it, and why. Therefore, it may be worthwhile for future research to solicit and examine substantive outputs and assess whether those outputs are equally clear, definite, and confident across different client types.

Although this study’s findings have limitations that are common to empirical research, this Note offers novel insights into algorithmic discrimination in the contracting space. Plausibly, ChatGPT discriminates against individuals when tasked with advising them in a contract negotiation—as evidenced by the AI model suggesting renegotiation to individual clients less often and to a smaller degree than it does when advising other types of clients.

As noted above, additional scholarship can expand upon the research implemented in this Note to strengthen this conclusion. If future research confirms algorithmic discrimination in the contracting space, then AI models must be retrained to prevent further exacerbation of existing inequalities. If AI models discriminate against individuals as their contracting client, this behavior may worsen inequities between those who have the resources to renegotiate favorable contract terms (such as corporate firms) and those who do not (individuals, for example) and are therefore more likely to rely on AI as an accessible contract negotiation tool.¹⁷⁷

VIII. ENOUGH NEGATIVITY—WHAT IS AI GOOD AT?

While AI has a plethora of disadvantages that hinder its applicability to contract drafting and negotiation, it does have advantages in limited legal applications. For instance, given its ability to summarize information quickly and accurately, AI is a prime candidate for administrative, clerical, or other summary tasks. A number of these types of AI applications already exist, such as Evisort,¹⁷⁸ a contract workflow management program. AI can also streamline a law firm’s tracking of its billable hours (e.g., Clio AI¹⁷⁹). Furthermore, AI technology can prove useful in speeding up legal research by summarizing documents, as seen with LexisNexis’s Protégé.¹⁸⁰ As a rule of thumb, AI is best suited for tasks that do not require judgment. Unlike billing or other administrative tasks, contract drafting and negotiation requires immense judgment, which is why AI technology is better suited for legal uses other than contracting.

CONCLUSION

Artificial intelligence technology has taken the world by storm in recent years. Nearly every industry has experimented with new and innovative applications of AI technology, and the legal profession is no exception. Despite this enthusiasm, transactional attorneys should pause and seriously consider the negative implications and serious challenges involved when applying AI technology to the contracting space before they attempt to implement AI models into their practice. At the same time, it is important to remain mindful of the distinction between the “practice of the . . . [law]” and the “business of . . . [a law] firm[].”¹⁸¹ Given the contract law issues, equity concerns, legal profession challenges, and accuracy problems that abound when AI models draft and negotiate legal contracts, AI may be better suited to assist attorneys with administrative business tasks rather than the practice of law itself. This limitation on the use of AI in the contracting space is further underscored by ChatGPT’s tendency to discriminate against individuals when asked to assist them in contract negotiations, as demonstrated by the empirical research presented in this Note.

On the other hand, those determined to use AI in the contracting space may find it more useful in an in-house setting than in a traditional law firm. The typical in-house counsel functions as a “jack-of-all-trades” for their employer, managing multiple projects and legal practice areas simultaneously. Additionally, in-house counsel usually manages standard form contracts, particularly in cases when their business holds significant market power in negotiations with other parties. Maintaining a consistent client (i.e., the business) and contractual structure over multiple contract cycles would allow an AI program to detect familiar patterns and better understand the context and complexity needed to tailor contracts to the business’s needs. Furthermore, an experienced human in-house attorney may be able to manually adjust for any discriminatory patterns in an AI model’s outputted negotiation suggestions and provisions. Finally, the research presented in this Note indicates that large public and small private corporations face a lower risk of AI-driven discrimination in contract drafting and negotiation compared with other clients, such as individuals. Therefore, in an in-house attorney’s busy, consistent, and controlled setting, AI models may prove to have some utility.

However, technological innovation has its limits, and AI models are not yet suited for broad applications in legal contracting and negotiation. While this author is eager to see how AI developers and legal professionals address the current challenges of applying AI to contract drafting and negotiation—particularly, AI’s discriminatory tendencies—she is also reassured that transactional attorneys still enjoy some level of job security, at least for now.

Attachment A: Commercial Real Estate Lease Provisions

PREMISES

Landlord hereby leases to Tenant and Tenant hereby leases from Landlord those certain premises (the ‘Premises’) consisting of approximately _______ square feet located at _______________________, as more particularly described in Exhibit A attached hereto and incorporated herein by reference.

TERM.

The term of this Lease shall be for a period of ______ years, commencing on ____________, 20___ (the ‘Commencement Date’) and ending on ____________, 20___ (the ‘Expiration Date’), unless sooner terminated as provided herein.

BASE RENT.

Tenant shall pay to Landlord as Base Rent for the Premises, without any setoff or deduction, the annual sum of $_______________ payable in equal monthly installments of $_______________ in advance on the first day of each month during the Term.

SECURITY DEPOSIT.

Upon execution of this Lease, Tenant shall deposit with Landlord the sum of $_______________ as security for the faithful performance by Tenant of all terms, covenants, and conditions of this Lease. If Tenant fails to pay rent or other charges due hereunder, or otherwise defaults with respect to any provision of this Lease, Landlord may use, apply or retain all or any portion of the Security Deposit to cure such default or to compensate Landlord for any loss or damage resulting from such default.

PERMITTED USE.

Tenant shall use and occupy the Premises solely for _______________________ and for no other purpose without the prior written consent of Landlord.

OPERATING EXPENSES.

In addition to Base Rent, Tenant shall pay as Additional Rent Tenant’s proportionate share of all Operating Expenses. ‘Operating Expenses’ shall mean all costs and expenses incurred by Landlord in connection with the ownership, management, operation, maintenance, repair, and replacement of the Building and Property, including but not limited to: property taxes and assessments, insurance premiums, utilities, management fees, common area

maintenance, landscaping, and repairs and maintenance not required to be performed by Tenant.

MAINTENANCE AND REPAIRS.

Landlord shall maintain in good repair the structural portions of the Building, including the foundation, exterior walls, structural portions of the roof, and common areas. Tenant shall, at Tenant’s sole cost and expense, maintain the Premises in good condition and repair, including all interior non-structural portions of the Premises, such as doors, windows, glass, and utility systems exclusively serving the Premises.

ALTERATIONS AND IMPROVEMENTS.

Tenant shall not make any alterations, additions, or improvements to the Premises without the prior written consent of Landlord, which consent shall not be unreasonably withheld for non-structural alterations costing less than $____________. All alterations shall be made at Tenant’s sole cost and expense and shall become the property of Landlord upon the expiration or termination of this Lease.

INSURANCE REQUIREMENTS.

Tenant shall, at Tenant’s expense, obtain and keep in force during the Term of this Lease a policy of commercial general liability insurance with coverage of not less than $____________ per occurrence and $____________ general aggregate. Tenant shall also maintain property insurance covering Tenant’s personal property, fixtures, and equipment. Landlord shall be named as an additional insured on Tenant’s liability policies.

INDEMNIFICATION.

Tenant shall indemnify, defend, and hold Landlord harmless from any and all claims, damages, expenses, and liabilities arising from Tenant’s use of the Premises or from any activity permitted by Tenant in or about the Premises. Landlord shall indemnify, defend, and hold Tenant harmless from any and all claims, damages, expenses, and liabilities arising from Landlord’s negligence or willful misconduct.

ASSIGNMENT AND SUBLETTING.

Tenant shall not assign this Lease or sublet all or any part of the Premises without the prior written consent of Landlord, which consent shall not be unreasonably withheld. Any assignment or subletting without such consent shall be void and shall constitute a default under this Lease.

DEFAULT AND REMEDIES.

The occurrence of any of the following shall constitute a material default and breach of this Lease by Tenant: (a) failure to pay rent when due if the failure continues for ____ days after written notice has been given to Tenant, (b) abandonment of the Premises, or (c) failure to perform any other provision of this Lease if the failure is not cured within ____ days after written notice has been given to Tenant. Upon any default, Landlord shall have all remedies available under applicable law.

QUIET ENJOYMENT.

Landlord covenants that Tenant, upon paying the rent and performing the covenants herein, shall peacefully and quietly have, hold, and enjoy the Premises during the Term hereof.

ENTRY BY LANDLORD.

Landlord reserves the right to enter the Premises at reasonable times to inspect the same, to show the Premises to prospective purchasers, lenders, or tenants, and to make necessary repairs. Except in cases of emergency, Landlord shall give Tenant reasonable notice prior to entry.

SIGNAGE.

Tenant shall not place any sign upon the Premises without Landlord’s prior written consent. All signs shall comply with applicable laws and ordinances.

COMPLIANCE WITH LAWS.

Tenant shall comply with all laws, orders, ordinances, and other public requirements now or hereafter affecting the Premises or the use thereof. Landlord shall comply with all laws, orders, ordinances, and other public requirements relating to the Building and common areas.

ENVIRONMENTAL PROVISIONS.

Tenant shall not cause or permit any Hazardous Materials to be brought upon, kept, or used in or about the Premises by Tenant without the prior written consent of Landlord. Tenant shall indemnify, defend, and hold Landlord harmless from any and all claims, judgments, damages, penalties, fines, costs, liabilities, or losses arising from the presence of Hazardous Materials on the Premises which are brought upon, kept, or used by Tenant.

SUBORDINATION.

This Lease is and shall be subordinate to all existing and future mortgages and deeds of trust on the property. Tenant agrees to execute any subordination, non-disturbance and attornment agreements required by any lender, provided that such lender agrees not to disturb Tenant’s possession of the Premises so long as Tenant is not in default under this Lease.

FORCE MAJEURE.

Neither party shall be deemed in default hereof nor liable for damages arising from its failure to perform its duties or obligations hereunder if such failure is due to causes beyond its reasonable control, including, but not limited to, acts of God, acts of civil or military authority, fires, floods, earthquakes, strikes, lockouts, epidemics, or pandemics.

HOLDOVER.

If Tenant remains in possession of the Premises after the expiration or termination of the Term without Landlord’s written consent, Tenant shall be deemed a tenant at sufferance and shall pay rent at _____ times the rate in effect immediately prior to such expiration or termination for the entire holdover period.

SURRENDER OF PREMISES.

Upon expiration or earlier termination of this Lease, Tenant shall surrender the Premises to Landlord in good condition, ordinary wear and tear and damage by fire or other casualty excepted. All alterations, additions, and improvements made to the Premises by Tenant shall remain and become the property of Landlord, unless Landlord requires their removal.

DISPUTE RESOLUTION.

Any dispute arising under this Lease shall be first submitted to mediation, and if mediation is unsuccessful, then to binding arbitration in accordance with the rules of the American Arbitration Association. The costs of mediation and arbitration shall be shared equally by the parties.

NOTICES.

All notices required or permitted hereunder shall be in writing and may be delivered in person (by hand or by courier) or sent by registered or certified mail, postage prepaid, return receipt requested, or by overnight courier, and shall be deemed given when received at the addresses specified in this Lease, or at such other address as may be specified in writing by either party.

OPTION TO RENEW.

Provided Tenant is not in default hereunder, Tenant shall have the option to renew this Lease for ____ additional period(s) of ____ years each on the same terms and conditions as set forth herein, except that the Base Rent shall be adjusted to the then-prevailing market rate. Tenant shall exercise this option by giving Landlord written notice at least ____ days prior to the expiration of the then-current term.

OPTION TO EXPAND.

Subject to availability, Tenant shall have the right of first offer to lease additional space in the Building that becomes available during the Term. Landlord shall notify Tenant in writing of the availability of such space and the terms upon which Landlord is willing to lease such space. Tenant shall have ____ days from receipt of such notice to accept or reject such offer.

RELOCATION.

Landlord reserves the right, upon providing Tenant with not less than ____ days’ prior written notice, to relocate Tenant to other premises within the Building or Project that are comparable in size, utility, and condition to the Premises. In the event of such relocation, Landlord shall pay all reasonable costs of moving Tenant’s property and improving the new premises to substantially the same standard as the Premises.

PARKING AND TRANSPORTATION.

Tenant shall be entitled to use ____ parking spaces in the Building’s parking facility on a non-exclusive basis. Landlord reserves the right to designate parking areas for Tenant and Tenant’s agents and employees.

BUILDING RULES AND REGULATIONS.

Tenant shall comply with the rules and regulations of the Building adopted and altered by Landlord from time to time, a copy of which is attached hereto as Exhibit B. Landlord shall not be responsible to Tenant for the non-performance of any of said rules and regulations by any other tenants or occupants of the Building.

GOVERNING LAW.

This Lease shall be governed by and construed in accordance with the laws of the State of ______________. If any provision of this Lease is found to be invalid or unenforceable, the remainder of this Lease shall not be affected thereby.

ENTIRE AGREEMENT.

This Lease contains the entire agreement between the parties and supersedes all prior agreements, whether written or oral, with respect to the subject matter hereof. This Lease may not be modified except by a written instrument executed by both parties.

Attachment B: Excel Spreadsheet & Python Code

The Excel spreadsheet of OpenAI’s API outputs and the Python code used to obtain this data is on file with the author and available upon request.

99 S. Cal. L. Rev. 239

Download

Carly Snell*

*Executive Articles Editor, Southern California Law Review, Volume 99; J.D. Candidate 2026, University of Southern California Gould School of Law; Master of Public Policy Candidate 2027, University of Southern California Sol Price School of Public Policy; B.S., Mathematics, 2023, University of Arizona; B.A., Political Science, 2023, University of Arizona. I extend my sincere gratitude to Professor Jonathan H. Choi for his invaluable guidance, my friends and family for their unwavering support, and the editors of the Southern California Law Review for their hard work and dedication in preparing my Note for publication.

Getting a Bad “Wrap”: An Analysis of Online Contract Cases in California After Step-Saver and ProCD

April 2025April 2025Sophie Lee*

Consumers routinely enter contracts when engaging in online commerce. Such “contracts of adhesion” are created by sellers and provide no opportunity to negotiate. By surveying California state and federal court cases, this Note explores how California courts evaluate notice. Courts recognize four types of online contracts: clickwrap, browsewrap, scrollwrap, and sign-in-wrap. This Note also draws on the seminal cases Step-Saver Data Systems v. Wyse and ProCD, Inc. v. Zeidenberg to discuss and compare the standards of notice used by courts. Overall, a uniform standard of notice has not yet emerged in California, and Step-Saver and ProCD remain relevant as courts primarily rely on fact-specific notice analysis. The utility of the four types of “wrap” categories may be diminishing as the online landscape evolves and changes.

INTRODUCTION

Imagine that you are purchasing something online, as you have likely done in the past. You enter the seller’s website and pick out the product you want to buy—say, a pair of socks—then start the payment process by entering your personal information. As you are about to click “Complete Purchase,” you see a notice pop up on the screen: “By completing your purchase, you agree to our Terms and Conditions.” You pause for a moment, wondering whether you should review the terms, but that would involve opening another webpage and parsing through pages of dense legal language. You have purchased socks online before—what is the worst that can happen? Instead, you agree and complete your purchase. When you think back to the transaction, perhaps you will remember seeing the pop-up notice, or perhaps you will not. The result will likely be the same. You have assented to the seller’s terms and entered a contract.

It is a common law principle that buyers and sellers should be held accountable for the contracts that they create, but one-sided form contracts are sometimes regarded differently. Courts have grappled with the issue of assent to sales contracts since before the Internet became the commercial engine that it is today. “Box-top” or “shrinkwrap” contracts list the terms of the agreement on the outside of a product’s packaging. By opening the packaging, a buyer manifests their intent to be bound by the terms. In 1991, the Third Circuit Court of Appeals decided a case involving a box-top license on a software product.¹ The court ruled for the software buyer, deeming the box-top license a proposal for new terms of agreement rather than a binding contract.² In contrast, when a similar case made its way to the Seventh Circuit Court of Appeals in 1996, the court ruled in favor of a software seller.³ The seller’s shrinkwrap agreement was binding because opening a package was a valid way for a buyer to accept the seller’s offer.⁴ Step-Saver Data Systems v. Wyse (“Step-Saver”) and ProCD, Inc. v. Zeidenberg (“ProCD”), respectively, came to represent two distinct views on box-top and shrinkwrap contracts. Simply put, Step-Saver placed a greater burden on sellers by giving buyers the benefit of the doubt as to their awareness of new terms. ProCD, however, placed a greater burden on buyers to apprise themselves of a seller’s terms. Though nearly three decades old, Step-Saver and ProCD still form the foundation of how courts approach disputes over online contracts.

Today, the average consumer would struggle to avoid such “contracts of adhesion” (also called form or “boilerplate” contracts), which offer no opportunity for negotiation on the part of the buyer. These contracts are efficient for sellers; modern commerce would not be nearly as fast or profitable if it were not for these contracts. But the ubiquity of online contracting and the rapid evolution of sellers’ websites raises questions about contract law and consumer protection. How should courts balance enabling transaction efficiency while ensuring buyers are aware of sellers’ terms?

California generally categorizes online contracts by modes of assent and into four types: “clickwraps,” “browsewraps,” “scrollwraps,” and “sign-in-wraps.”⁵ Clickwrap agreements require an affirmative act of assent to become binding (e.g., clicking a button that reads “I have read and accepted the Terms and Conditions”).⁶ In contrast, browsewrap agreements do not require an affirmative act as to specific terms of the contract; “an internet user accepts a website’s terms of use merely by browsing the site” ⁷ (e.g., a text banner that reads, “Use of this website constitutes agreement to the Terms and Conditions”). Scrollwrap agreements require a user to physically scroll to the bottom of a page containing the terms before proceeding to use a website.⁸ Finally, sign-in-wrap agreements require a user to sign up for an Internet service or product, the process of which indicates assent to the seller’s terms.⁹ These four types of “wrap” create contracts of adhesion and, as their names suggest, are regarded by courts as the digital successors of shrinkwrap. Thus, when faced with a clickwrap, browsewrap, scrollwrap, or sign-in-wrap agreement, buyers are offered no opportunity to negotiate and can only “take it or leave it.”¹⁰

This Note presents a case law survey of California state and federal district court cases between the years 2014 and 2024. It discusses the validity of the four commonly recognized types of online agreements and analyzes how courts’ approaches differ depending on the type of “wrap.” Part I provides background on contract common law, Step-Saver and ProCD, and significant U.S. Court of Appeals decisions. Part II details the case law survey: Section II.A describes state court cases and Section II.B describes federal district court cases. Section II.C summarizes the results of the survey and considers its implications for the way courts categorize online agreements and for the legacy of Step-Saver and ProCD.

This Note concludes that state and federal components of the case law survey largely reached the same outcomes with similar reasoning. Courts used multiple standards to determine whether a buyer received adequate or sufficient notice of a seller’s terms, including both a “reasonable notice” and a “reasonably prudent” user standard that can be traced back to ProCD and Step-Saver. This survey shows that a predominant standard for notice has not yet emerged in California (although recent approaches set out by the Ninth Circuit may promote greater consistency going forward). Overall, courts generally remained deferential to sellers and their offers. Fact-specific inquiries into whether a buyer was given reasonable notice were common among the cases surveyed. Thus, meaningful categories of “wrap” types may be gradually losing utility. Finally, this Note briefly considers whether Step-Saver and ProCD are still relevant to current and prevalent forms of online contracts and explains that these cases establish and solidify California’s most prevalent notice standards.

I. BACKGROUND

It is a basic principle of common law that the formation of a contract requires an “offer” and “acceptance.”¹¹ Step-Saver Data Systems v. Wyse and ProCD, Inc. v. Zeidenberg are seminal cases for their applications of common law principles within the context of box-top and shrinkwrap sales agreements. The same fundamental issues and principles remain relevant among newer types of agreements for selling goods and services on the Internet, such as clickwrap and browsewrap agreements. Today, courts often defer to sellers’ proposed modes of assent while using a fact-based “adequate notice” standard to evaluate the validity of a “wrap” agreement.¹²

A. Contract Common Law: Offer and Acceptance

Because the “elemental principles of contract formation apply with equal force to contracts formed online,”¹³ the same principles of contract common law are relevant when considering the validity of an online agreement.¹⁴ For a contract to be enforceable, common law requires that the parties’ bargaining process must meet two basic requirements: (1) both parties must assent to be bound, and (2) the agreement must be “definite” enough to be enforceable.¹⁵ The first requirement incorporates the presumption that one must consent to be bound, while the second requirement emphasizes the importance of receiving what one contracted for.¹⁶ The process of assenting can be broken down into two steps: “offer” and “acceptance.”¹⁷ An offer is a “promise” conditional on an action by the offeree.¹⁸ When an offeror makes an offer to the offeree, the offeree can accept, conveying their assent to be bound by the offeror’s terms. Offers can take many forms, and the offeror has the ability and authority to set the terms of their offer and to specify a mode of acceptance.¹⁹ Disputes can arise over whether the offeree had reason to believe that an offer was intended by the offeror to constitute an offer.²⁰ As discussed further below, in the realm of online contracts, consumers are often unaware that completing a purchase or signing into an account indicates assent to the terms of a seller’s agreement or even that a contract is being formed at all.

Parties can manifest assent in writing, through spoken word, or through conduct.²¹ Doctrine on assent is split between a subjective theory of assent, which focuses on the actual intent of the parties to be bound through a “meeting of the minds,” and an objective theory of assent, which focuses on the “external . . . appearance of the parties’ intentions as manifested by their actions.”²² To avoid issues related to the negotiation process, many sellers use form contracts that set out standard, nonnegotiable terms for transactions.²³ An offeree has only two options: to proceed with the transaction and accept the terms, or to decline.²⁴ These contracts are highly efficient for offerors but can come with drawbacks for offerees. For example, under common law, it does not matter if an offeree assents carelessly or fails to consider the legal consequences of a contract. Failure to read a contract is not a defense to breach of contract.²⁵

B. From Shrinkwrap to Clickwrap

The court in Step-Saver invalidated a shrinkwrap contract and deemed it a modification of an existing contract to which the buyer did not affirmatively assent. In contrast, the court in ProCD held that a shrinkwrap license was valid because the buyer was provided notice of the terms. Courts generally examine whether a seller provided adequate notice of its terms because online modes of assent to form contracts and website checkout flows greatly vary. In California, online contracts are sorted into four categories: clickwrap, browsewrap, scrollwrap, and sign-in-wrap. Each category has its own unique implications.

1. Step-Saver and ProCD

The box-top license printed on each package in Step-Saver Data Systems v. Wyse was a form contract that stated, “Opening this package indicates your acceptance of these terms and conditions. If you do not agree with them, you should promptly return the package unopened to the person from whom you purchased it . . . .”²⁶ Step-Saver, the buyer, argued that the box-top license materially altered a contract that was previously negotiated over the phone with The Software Link, Inc. (“TSL”), the seller, and that it was not binding under Uniform Commercial Code (“UCC”) Section 2-207.²⁷ On the other hand, TSL argued that a contract came into existence when Step-Saver received the terms of the license on the package and still proceeded to open the box; thus, phone conversations were merely counteroffers and negotiations.²⁸ The court ruled for Step-Saver, deciding that the box-top license should be seen as “one more form in a battle of forms”²⁹ and that the terms were not binding because they materially altered the parties’ agreement.³⁰ Judge John Minor Wisdom emphasized the fact that based on the parties’ previous negotiations, Step-Saver would not have expected to be bound by the box-top license.³¹ In response to TSL’s argument that its offer to issue a refund protected Step-Saver enough to validate the box-top license, Judge Wisdom wrote, “[w]e see no basis in the terms of the box-top license for inferring that a reasonable offeror would understand from the refund offer that certain terms of the box-top license, such as the warranty disclaimers, were essential to TSL.”³² In his holding, he wrote that “Step-Saver [could] reasonably believe that, while TSL desires certain terms, it has agreed to do business on other terms.”³³ Thus, this decision implies that a contract should not be binding unless a buyer affirmatively assents to a form contract and the parties reasonably believe that it is binding.

Judge Wisdom also rejected the seller’s arguments that ruling in favor of Step-Saver would adversely affect the industry. He wrote:

We are not persuaded that requiring software companies to stand behind representations concerning their products will inevitably destroy the software industry. We emphasize, however, that we are following the well-established distinction between conspicuous disclaimers made available before the contract is formed and disclaimers made available only after the contract is formed.³⁴

The court also speculated that sellers who justify the use of a box-top license with an optional refund provision might be “relying on the purchaser’s investment in time and energy in reaching this point in the transaction to prevent the purchaser from returning the item,” suggesting that a refund provision is generally not an adequate safeguard for consumers who assent to a license by opening a package.³⁵ Step-Saver represents a rare victory for consumers subjected to form contracts because it held the parties accountable to only the terms that were explicitly negotiated and agreed on.

In ProCD, Inc. v. Zeidenberg, a buyer violated a software license that restricted use of the software to “noncommercial” activity only.³⁶ The buyer, Matthew Zeidenberg, claimed that the shrinkwrap license should not be valid because it did not appear on the outside of the packaging and the terms could only be viewed by opening and using the software.³⁷ However, Judge Frank Easterbrook treated the license like an ordinary contract for the sale of goods, concluding that Zeidenberg could validly assent by doing as ProCD had requested: opening and using the software.³⁸ Judge Easterbrook stated that consumers can generally assent through any means held out as a form of acceptance by the seller, with exceptions for a seller’s bad faith.³⁹ Judge Easterbrook used UCC § 2-204 to support the common law principle that a seller is the “master of the offer” who can invite and limit means of acceptance;⁴⁰ “[a] buyer may accept by performing the acts the vendor proposes to treat as acceptance.”⁴¹ Contracts can be formed in many ways and “ProCD proposed such a different way, and without protest Zeidenberg agreed.”⁴² Further, ProCD was reasonable in its proposed form of acceptance because even after the package was opened “the software splashed the license on the screen and would not let [the buyer] proceed without indicating acceptance.”⁴³ An important part of Judge Easterbrook’s decision was that the software incorporated a pop-up box containing the agreement terms, creating reasonable notice of the terms for the buyer.⁴⁴ Additionally, contrary to Judge Wisdom’s reasoning in Step-Saver, Judge Easterbrook determined that an option to return the product for a full refund added to the validity of the buyer’s assent (though interestingly, in a 2004 interview of Matthew Zeidenberg and attorney David Austin, Austin claimed that the deposition of ProCD President James Bryant had revealed that ProCD did not have an actual return policy).⁴⁵ Sellers and businesses embraced Judge Easterbrook’s decision and shrinkwrap licenses became “generally accepted” “[w]ithin six years” of the ProCD case.⁴⁶ Eric Posner wrote that Judge Easterbrook “reformulate[d] [the] offer-acceptance doctrine so as to permit enforcement of ‘terms later’ contracts, an important new business tool.”⁴⁷

In the wake of Step-Saver, ProCD came to represent a validation of the use of form contracts to conduct business. Judge Easterbrook stated that “[t]ransactions in which the exchange of money precedes the communication of detailed terms are common” and used the purchase of insurance as an example.⁴⁸ In a subsequent case, Hill v. Gateway 2000, Inc., Judge Easterbrook clarified that ProCD was not just limited to software and was about “the law of contract” in general.⁴⁹ Furthermore, “[p]ractical considerations support[ed] allowing vendors to enclose the full legal terms with their products.”⁵⁰ For example, cashiers could not “be expected to read legal documents to customers before ringing up sales.”⁵¹ Judge Easterbrook’s words feel especially relevant today given the fast-paced nature of commerce. Notably, and perhaps regrettably, ProCD did not set real standards for what sellers should actually include on packaging in order to create notice of agreement terms. The court may have declined to create bright-line requirements for notice out of fear that restrictions would interfere with a seller’s packaging.⁵² Nevertheless, since the 1990s, when Step-Saver and ProCD created a circuit split, both decisions have been highly influential in the development of online contract law.

2. Online Contracts Today

Like shrinkwrap contracts, online form contracts for the sale of goods or services require a manifestation of assent for an offeree to be bound by a seller’s nonnegotiable set of terms.⁵³ Clickwrap, browsewrap, scrollwrap, and sign-in-wrap agreements govern millions of transactions, drawing on the same common law principles as the shrinkwrap contracts in Step-Saver and ProCD. “While Internet commerce has exposed courts to many new situations, it has not fundamentally changed the requirement that ‘[m]utual manifestation of assent, whether by written or spoken word or by conduct, is the touchstone of contract.’ ”⁵⁴ Shrinkwrap agreements find a modern analogue in browsewrap agreements: neither shrinkwrap nor browsewrap requires an affirmative act of assent to specific terms to be binding. Like the buyer in Step-Saver who needed only to continue opening the package to accept the seller’s terms, a buyer subject to a browsewrap agreement need only to continue interacting with a website to accept a set of terms. There is no clear instruction to, for example, click a checkbox before making a purchase. Judge Wisdom might be skeptical of the validity of browsewrap because it might not be reasonable for a buyer to expect to be bound in such a way. Indeed, California courts are generally more inclined to rule for the validity of a clickwrap or a scrollwrap contract than a browsewrap contract because clickwrap and scrollwrap require an affirmative act, evincing that the buyer was more likely to be put on notice instead of passively clicking.⁵⁵

Because wrap agreements are contracts of adhesion that offer no opportunity for a buyer to negotiate, a buyer’s only choices are to assent and complete the transaction or to walk away. Karl Llewellyn theorized in The Common Law Tradition that “there is no assent at all” to the specific terms within a boilerplate agreement; instead, there is “a blanket assent” to all terms of the agreement.⁵⁶ In other words, buyers either assent to all the terms, or they do not. Thus, buyers accepting clickwrap contracts should not be construed as assenting to one provision or another, but rather as assenting to the seller’s entire agreement.

The “take-it-or-leave-it” nature of these contracts has potential to leave buyers stuck with terms they do not like. The court in Step-Saver considered the imbalanced nature of contracts of adhesion, reasoning that the seller may have been relying on the fact that the buyer had already invested time and energy into the transaction.⁵⁷ Some legal scholars, including Cheryl B. Preston, are skeptical about the ability of online contracts to be anything but one sided.⁵⁸ Buyers often fail to understand the terms to which they are assenting. Though it is a common law principle that whether a buyer has actually read a form contract is not dispositive of whether they will be bound, buyers who attempt to read the terms may find them inaccessible and full of legalese. A 2019 study by two law professors analyzed the sign-in-wrap contracts of 500 popular U.S. websites and found that 99% of them could be categorized as “unreadable.”⁵⁹

On the other hand, Judge Easterbrook might argue that form contracts do not leave buyers without options because the nature of a competitive market forces sellers to create favorable terms for buyers.⁶⁰ He wrote in his opinion for ProCD that “[c]ompetition among vendors, not judicial revision of a package’s contents, is how consumers are protected in a market economy.”⁶¹ Additionally, efficiency and convenience are important to online consumers, who are generally unwilling to complicate a transaction. Eric Posner uses the term “cognitive overload” to describe how buyers may be dissuaded if too much information is received up front.⁶² “If the seller conveys too much information, she will drive away buyers. If the seller conveys too little information, she will mislead buyers and possibly drive them away as well.”⁶³ Even minor setbacks in a checkout process can mean the difference between completing a purchase or not. Forbes reported that around twenty-five percent of online shoppers choose not to go through with a purchase if the website forces them to create a new account.⁶⁴ For certain customers, the risk of potential legal complications down the road is a fair substitute for simple and efficient online processes.⁶⁵

The validity of online form contracts often turns on whether the mode of acceptance created by seller-offerors adequately notifies buyers of the formation of an agreement on the seller’s terms. The theory behind notice is that it can level the playing field within the realm of online contracting. E. Allan Farnsworth notes that the “lack of equality between a person who is meticulous or who chances to have knowledge and a person who is blissfully unknowing is a patent point for dissatisfaction.”⁶⁶ Because there is always an inherent potential for unfairness when there is no real negotiation of terms, there should be an attempt to create awareness for the non-drafting party. This is a defining characteristic of clickwrap and browsewrap contracts, especially because the ubiquity of ecommerce means that they are accessible to the expert as well as the layperson. In Step-Saver, Judge Wisdom considered whether a “reasonable” buyer could expect to be notified of the seller’s priorities.⁶⁷ In ProCD, the conspicuousness of the seller’s pop-up notice box was an important factor in creating objective notice for the buyer.⁶⁸

It is challenging to synthesize a common standard for notice because clickwrap, browsewrap, scrollwrap, and sign-in-wrap can be nebulous categories. For example, courts frequently characterize contracts containing elements of both browsewrap and clickwrap as “hybridwrap.”⁶⁹ One example of hybridwrap is acknowledged by courts when “the button required to perform the action manifesting assent (e.g., signing up for an account or executing a purchase) is located directly next to a hyperlink to the terms and a notice informing the user that, by clicking the button, the user is agreeing to those terms.”⁷⁰ Hybridwrap may exist when users are reasonably notified of “the existence of the website’s terms of use” and are often guided to click a button to signify agreement.⁷¹ The case law survey in Part II shows that courts often struggle to categorize wrap agreements, and in lacking categorical rules to guide them, courts must look for adequate notice of the seller’s terms.

Additionally, as will be discussed at length in Section II.C.1, adequate notice has advantages and disadvantages as a legal standard. One advantage is that it allows room for evolution in response to the rapidly evolving digital world. Ecommerce is still growing, especially given the recent COVID-19 pandemic, during which many businesses and consumers relied on online orders. The global ecommerce market is expected to total $6.3 billion in 2024 and $7.9 trillion by 2027.⁷² Additionally, buyers today make online purchases faster and more casually than they have in the past. Consumers who make habitual and trivial purchases online may not be privy to a seller’s terms when, from the consumer’s perspective, the transaction is as inconsequential as a “pair of socks.”⁷³ Thus, not only are the means of business evolving, but the role and mindset of the consumer are changing as well. Courts have applied similar notice standards for the past three decades, but these standards can sometimes be a moving target.

C. Second and Ninth Circuit Decisions: Nguyen, Berman, and Specht

Major circuit court decisions from the past two decades show that courts often defer to sellers’ proposed modes of assent to their agreements while using a fact-based adequate notice standard to evaluate the validity of a wrap agreement.

In Nguyen v. Barnes & Noble Inc., a buyer unwittingly assented to Barnes & Noble’s terms of use through a browsewrap agreement while shopping online.⁷⁴ The disputed arbitration term could not be viewed unless the buyer clicked on a hyperlink that was placed at the bottom of the webpage.⁷⁵ Additionally, Barnes & Noble did not require any affirmative act of assent as part of the transaction.⁷⁶ The court held for the buyer and denied Barnes and Noble’s motion to compel arbitration.⁷⁷ The Nguyen court characterized online contracts as primarily coming in “two flavors”: “clickwrap” and “browsewrap.”⁷⁸ Browsewrap was defined as an agreement where “a website’s terms and conditions of use are generally posted on the website via a hyperlink at the bottom of the screen.”⁷⁹ Because browsewrap, unlike clickwrap, lacks an act of affirmative assent, the standard in Nguyen turned on “whether the user ha[d] actual or constructive knowledge.”⁸⁰ Thus, the buyer was not bound by the terms of use because he was not adequately put on notice by the design of the website and the inconspicuous and “buried” hyperlink to the terms and conditions.⁸¹ A rare bright-line rule for browsewrap emerged from this case:

[W]here a website makes its terms of use available via a conspicuous hyperlink on every page of the website but otherwise provides no notice to users nor prompts them to take any affirmative action to demonstrate assent, even close proximity of the hyperlink to relevant buttons users must click on—without more—is insufficient to give rise to constructive notice.⁸²

Few other notice-related bright-line rules have been articulated, but Nguyen represented a turning point in the world of online contracts, discouraging sellers from implementing browsewrap agreements without a buyer’s affirmative act of assent.

By 2021, scrollwrap and sign-in-wrap found their way into the lexicon of the courts, and California came to recognize four categories instead of the “two flavors” set forth in Nguyen.⁸³ The Ninth Circuit affirmed Nguyen in Berman v. Freedom Financial Network, in which a company’s terms and conditions were not conspicuous or noticeable on the website.⁸⁴ The terms were hyperlinked, but displayed in the same font and color as an adjacent sentence, not in the typical blue color a reasonable buyer would expect of a hyperlink.⁸⁵ The court held that the company did not call sufficient attention to the fact that clicking “continue” would indicate assent to the company’s terms, using a “reasonably conspicuous notice” standard to decide that the contract should be unenforceable.⁸⁶ Its fact-specific inquiry also assessed whether a “reasonably prudent Internet user” would be given notice given the webpage’s fonts, font sizes, colors, overall design, and readability of the webpage.⁸⁷ The court found that such a user would not be put on notice given that the hyperlink was not conspicuous in color or design.⁸⁸ This standard is consistent with Step-Saver, which looked to the reasonable beliefs of the parties in assessing notice.⁸⁹ Lastly, the Berman court provided a two-part framework for courts’ inquiries into notice:

Unless the website operator can show that a consumer has actual knowledge of the agreement, an enforceable contract will be found based on an inquiry notice theory only if: (1) the website provides reasonably conspicuous notice of the terms to which the consumer will be bound; and (2) the consumer takes some action, such as clicking a button or checking a box, that unambiguously manifests his or her assent to those terms.⁹⁰

Berman is a recent case, and lower courts have generally been slow to adopt this exact two-part framework. As will be discussed in Part II, courts take—and have taken—a variety of approaches to conduct similar notice inquiries. ⁹¹

In Oberstein v. Live Nation Entertainment, Inc., the Ninth Circuit considered another factor when assessing notice: the expectation of a continued relationship with a seller.⁹² A ticketing company’s website presented users with buttons that read “you agree to our Terms of Use” at three independent stages: creating an account, signing into an account, and completing a purchase.⁹³ The court considered both “the context of the transaction” and the “placement of the notice.”⁹⁴ Because the context of the transaction required full registration and implied somewhat of a “continuing relationship,” users should have been notified of the terms of that relationship.⁹⁵ Thus, the court ruled for the ticketing company and added a new dimension to the adequate notice standard.⁹⁶

Keebaugh v. Warner Bros. Entertainment Inc., a 2024 Ninth Circuit case, further clarified the standard set forth in Berman.⁹⁷ On a mobile entertainment app, users were presented with a large button that read “Play,” and small text below the button that read “By tapping ‘Play,’ I agree to the Terms of Service.”⁹⁸ Using both the Berman two-part inquiry and the “context” standard from Oberstein, the court categorized the agreement as sign-in-wrap and ruled for the entertainment company.⁹⁹ The court defined the “conspicuous” notice part of the Berman standard as “displayed in a font size and format such that the court can fairly assume that a reasonably prudent Internet user would have seen it.”¹⁰⁰ Additionally, “[s]imply underscoring words or phrases . . . will often be insufficient to alert a reasonably prudent user that a clickable link exists.”¹⁰¹ In terms of a continuing relationship between company and user, the court emphasized that the context of downloading a mobile app carries an implication of long-term use.¹⁰² Again, as demonstrated in Part II, courts in California have yet to latch onto the Berman standard. Courts have been using—and continue to use—similar, but not identical, standards.

New York law and California law often “dictate the same outcome” and draw from the same precedent.¹⁰³ The jurisdictions frequently exchange standards and reference the same lines of reasoning for cases considering the validity of an online contract. Further, other U.S. Courts of Appeal frequently apply California contract law as well.¹⁰⁴ In the 2002 Second Circuit case Specht v. Netscape Communications Corp., then-Judge Sotomayor applied California law in denying a software company’s motion to compel arbitration after a buyer was unaware of the terms of the contract.¹⁰⁵ In circumstances where consumers are “urged to download free software,” “clicking on a download button does not communicate assent to contractual terms” without adequate notice.¹⁰⁶ Judge Sotomayor used a “reasonably prudent offeree of downloadable software” standard in determining whether it would be reasonable to conclude that the buyer should have been aware of the terms.¹⁰⁷ Like Judge Wisdom in Step-Saver and the Ninth Circuit in Berman, Judge Sotomayor examined the belief of the parties in determining that a “reasonably prudent offeree in plaintiffs’ position would necessarily have known or learned of the existence of the SmartDownload license agreement.”¹⁰⁸ She held that “a reference to the existence of license terms on a submerged screen is not sufficient to place consumers on inquiry or constructive notice of those terms.”¹⁰⁹ Finally, Judge Sotomayor also distinguished the facts of Specht from the facts of ProCD, in which the buyer “was confronted with conspicuous, mandatory license terms every time he ran the software on his computer.”¹¹⁰ However, she also noted that cases such as ProCD “do not help defendants” and emphasized the necessity of reasonably conspicuous notice “if electronic bargaining is to have integrity and credibility” going forward.¹¹¹

In 2017, the Second Circuit decided Meyer v. Uber Technologies, Inc., an influential case among a slew of recent rideshare-related contract cases. The court held that a consumer unambiguously manifested assent to Uber’s terms of service because a reasonable user would have seen and known that clicking a registration button would constitute assent to terms accessible via hyperlink.¹¹² Even though the sign-in-wrap agreement served two functions—“creation of a user account and assent to the Terms of Service”—the consumer’s assent was still valid given the “physical proximity of the notice to the register button and the placement of the language in the registration flow.”¹¹³ Interestingly, the court seemed to prioritize the creation of notice over the type of wrap in dispute. The court stated that “[c]lassification of web-based contracts alone . . . does not resolve the notice inquiry.”¹¹⁴ In this case, the user was bound because they were “expressly warned . . . that by creating an Uber account, the user was agreeing to be bound by the linked terms.”¹¹⁵

In general, Nguyen, Berman, Oberstein, Keebaugh, Specht, and Meyer show that courts must consider notice standards within the reality of the Internet and recognize the necessity of electronic form contracts to conduct ecommerce. Finding a balance between a consistent standard for sufficient notice and offeror efficiency, however, has proven to be challenging. Courts have issued very few bright-line requirements for offerors and generally take an “ex ante approach by emphasizing what the drafter should have done to make the terms prominent and noticeable.”¹¹⁶ This approach might be criticized as reactive and too deferential to sellers, who are in a better position to create awareness of their terms because they can exercise more control over a buyer’s experience by designing the website.

Indeed, the common law principle that the offeror remains the “master” of the offer holds true in the realm of online form contracts. However, cases like Berman and Specht also highlight more buyer-centric common law principles, accounting for the reasonable expectations of the average “prudent” buyer. A dominant standard has not yet been established by the Ninth Circuit, and California law encompasses both the “reasonable notice” and the “reasonably prudent” user standard. Thus, this Note’s case law survey attempts to analyze and identify how California courts utilize these flexible standards of notice to analyze buyers’ acceptance of sellers’ offers.

II. CASE LAW SURVEY

This survey examines state and federal district court cases to paint a picture of California courts’ treatment of wrap agreements. Section II.A focuses on California state courts and discusses notable cases within the context of Step-Saver, ProCD, Nguyen, and Specht. It concludes that clickwrap agreements remain presumably enforceable, browsewrap agreements require a more fact-specific inquiry, and sign-in-wrap agreements are not yet fully distinguishable from browsewrap agreements. Section II.B focuses on the ways in which cases in federal district courts in California are consistent or inconsistent with cases in state courts. Section II.B concludes that district court decisions are largely in line with state court decisions, factoring in scrollwrap cases as presumptively enforceable. Finally, Section II.C further analyzes and summarizes differences between the forums and comments on the lasting influence of Step-Saver and ProCD. Overall, this case law survey shows that standards of notice from both Step-Saver and ProCD have been incorporated into California law, but a predominant standard for assessing adequate notice for wrap contracts has yet to take hold.

Twenty California state court cases and twenty U.S. District Court cases involving online form contracts for the sale of goods or services were chosen for this survey as a representative sample. This Note provides a brief quantitative analysis, then a substantive qualitative analysis of cases in each group. There were two main reasons for conducting a more comprehensive qualitative analysis: (1) the reasoning in the following cases was often fact specific, especially when the agreements in question defied easy categorization; and (2) although the chosen cases are representative of recent decisions, many similar cases exist beyond what is depicted here. It should be noted that some cases surveyed involved multiple types of wrap, or contained agreements that could have plausibly been categorized in more than one way. Importantly, the cases in this survey were sorted by the courts’ own labels and characterizations for the wrap agreements in dispute.

Additionally, as discussed in Section I.B.2, the clauses most frequently in dispute—arbitration clauses, choice-of-forum clauses, and class-action waiver clauses—are small parts of long agreements.¹¹⁷ As per Llewellyn’s theory of “blanket assent” to terms in a boilerplate contract,¹¹⁸ courts consider the validity of entire contracts rather than specific provisions. Thus, the cases in this survey generally either enforced the validity of an agreement or found the agreement to be invalid as a whole.

Figure 1. Outcomes of Cases Included in Case Law Survey

A. California State Courts

Cases were chosen based on the following criteria: (1) cases arose out of California state courts; (2) cases were decided between the years 2014 and 2024 (inclusive); (3) the relationship between the parties to the case was that of a buyer and seller (or lessee/lessor), or the agreement in dispute arose out of a transaction for goods or services; and (4) the court addressed the validity of a clickwrap, browsewrap, scrollwrap, or sign-in-wrap contract. Interestingly, there have not yet been any cases concerning the validity of a pure scrollwrap agreement in this jurisdiction. This Note will not include substantial speculation as to how state courts might treat scrollwrap agreements, but the latter half of this case law survey involving federal cases will discuss how California state law is applied to scrollwrap. Generally, scrollwrap agreements appear to be more or less unanimously enforceable.¹¹⁹

Most of the selected cases involved disputes regarding forum-selection clauses and arbitration clauses, however, the nature of the disputed terms was of secondary importance because courts only consider whether the entire agreement is valid. It should be noted that the Federal Arbitration Act (“FAA”) generally treats the enforcement of arbitration agreements favorably.¹²⁰ However, the FAA also limits the role of the courts to two related inquiries: (1) “whether a valid arbitration agreement exists,” and (2) “whether the agreement encompasses the disputes at issue.”¹²¹ Online contract cases often turn on the first issue, as the second issue is typically less disputed by the parties. Thus, the court’s inquiry was often whether a valid contract—and therefore, a valid arbitration agreement—existed.¹²²

Of the twenty cases examined, nine cases involved clickwrap agreements, eight cases involved browsewrap, and four cases involved sign-in-wrap (one case involved both a browsewrap agreement and a sign-in-wrap agreement).¹²³ Seven of nine clickwrap cases held for the seller, three of eight browsewrap cases held for the seller, and two of four sign-in-wrap cases held for the seller.¹²⁴ The numeric breakdown of the case outcomes was secondary to the reasoning of the courts. In general, the courts found clickwrap contracts largely enforceable, barring unique circumstances with extraneous issues. Browsewrap agreements were examined more closely, and the courts were more inclined to prioritize fact-based notice inquiries in such cases, echoing Berman and Specht. Cases involving sign-in-wrap were less unified by a single standard, and Sellers v. JustAnswer LLC highlighted some of the inconsistencies and issues with the various standards set forth by state and federal courts. Overall, although the reasoning of the courts closely followed Ninth and Second Circuit precedent, the standards for notice were inconsistently applied, even within wrap categories.

1. Clickwrap Agreements

As the Ninth and Second Circuits have noted, courts often presume clickwrap agreements to be enforceable because buyers must affirmatively manifest assent to the terms in question by physically clicking to proceed with an online transaction.¹²⁵ This is consistent with the Berman standard, but of the cases decided after Berman, none used the two-part framework. Overall, the courts generally presumed the validity of clickwrap and occasionally looked for adequate notice.

The cases surveyed revealed that a notice inquiry was secondary to the presumption of enforceability of pure clickwrap agreements. For example, it typically did not matter what was written on the digital button or box that users were directed to click; the action of clicking was enough of an affirmative act to bind the user. In B.D. v. Blizzard Entertainment, Inc., a buyer clicked a button marked “Continue” and was bound by a seller’s License Agreement.¹²⁶ The button was accompanied by a pop-up notice that notified buyers that continuing with the transaction would manifest assent.¹²⁷ In Pierre v. Dexcom Inc. and Jackson v. Vines, the court declared that clickwrap agreements are “generally considered enforceable.”¹²⁸

Courts were less likely to presume that clickwrap agreements were enforceable if they found elements of other wrap agreements present in a seller’s website flow. Two clickwrap cases held for buyers. The first case is Doe v. Massage Envy Franchising, LLC, in which a buyer did not assent to a seller’s terms of service on an in-store electronic tablet because the font color of the statement of notice was not conspicuous, and the terms were hyperlinked, not plainly visible.¹²⁹ The seller motioned to compel arbitration after the buyer alleged that she was sexually assaulted at the seller’s franchise location.¹³⁰ The court emphasized that the buyer was under pressure to complete the forms quickly by seller’s staff, which factored into the assessment of whether the buyer was actually aware of the terms.¹³¹

The second case in which a buyer prevailed is Herzog v. Superior Court. In Herzog, a healthcare company prompted users to assent to its terms of use before using a glucose monitoring app.¹³² The agreement appeared to be “classic ‘clickwrap,’ ” prompting a user to click a box stating: “I agree to Terms of Use.”¹³³ However, merely “categorizing the purported agreement as a clickwrap [did] not resolve the formation question.”¹³⁴ The court looked for “reasonably conspicuous notice” of the existence of terms to which users would be bound—specifically, the idea that “the content of [the app’s] ‘Legal’ screen support[ed] the inference that the user’s action on that screen—here, clicking the checkbox—constituted an unambiguous manifestation of assent to those terms.”¹³⁵ The company’s notice did not suggest assent; it read: “By ticking the boxes below you understand that your personal information, including your sensitive health information, will be collected, used and shared consistently with the Privacy Policy and Terms of Use.”¹³⁶ The court concluded that a reasonably prudent user would fail to understand the relationship between the Terms of Use, the Privacy Policy, and the company’s data collection.¹³⁷ Furthermore, users were confused by the fact that the company’s app was not necessary to use its glucose monitoring technology.¹³⁸ Herzog can be distinguished from other cases in this survey because it involved clickwrap pertaining to multiple sets of terms and services. Nevertheless, Massage Envy and Herzog both provide interesting points of contrast to the general presumption that clickwrap creates a valid agreement.

Overall, with a couple exceptions, courts viewed clickwrap agreements as largely enforceable, sometimes presumptively so.

2. Browsewrap Agreements

California State courts were generally protective of buyers confronted with browsewrap agreements but were inconsistent in their applications of standards of notice. In 2014, the Ninth Circuit wrote that it was “more willing to find the requisite notice for constructive assent where the browsewrap agreement resemble[d] a clickwrap agreement—that is, where the user is required to affirmatively acknowledge the agreement before proceeding with use of the website.”¹³⁹ Following Nguyen and Berman, pure browsewrap agreements became rare; offerors began to require more from consumers using their websites in order to indicate assent to their terms.

When confronted with hybridwrap or browsewrap agreements, courts largely adhered to the precedent set by three main decisions applying California law to facts involving browsewrap agreements: Nguyen, Specht, and Long v. Provide Commerce Inc.¹⁴⁰ In Long, a flower seller’s checkout flow did not create adequate notice that placing an order indicated a buyer’s acceptance, nor did a link sent to the buyer’s email create notice of the seller’s terms.¹⁴¹ Because browsewrap agreements require no affirmative action, “absent actual notice, ‘the validity of [a] browsewrap agreement turns on whether the website puts a reasonably prudent user on inquiry notice of the terms of the contract.’ ”¹⁴² The court examined whether the conspicuousness of the hyperlinks and design elements of the seller’s website would put a reasonably prudent user on notice.¹⁴³ In dicta, the court agreed with the Nguyen court; simply displaying a hyperlink without further notice is likely not enough to “alert a reasonably prudent Internet consumer to click the hyperlink.”¹⁴⁴

But not all courts applied these notice standards in the same way, and some courts were more concerned with buyer protections than others. Drawing from Long and Nguyen, Kellman v. Honest Co. looked for “something more” in addition to a seller’s browsewrap agreement that would put a reasonably prudent buyer on notice.¹⁴⁵ The court found that while a hyperlink and notice of the seller’s terms were not buried on the webpage, “they were in small print of a lighter color” and were “surrounded by text that did not suggest that the hyperlink was important.”¹⁴⁶ The court also emphasized the “realities of internet marketing and use,” citing Judge Sotomayor’s reasoning in Specht, and stressed that notice of a seller’s terms is essential to the “integrity and credibility” of online contracting and the ecommerce industry.¹⁴⁷ Because sellers are aware that very few buyers read terms of use, some sellers “design their websites to take advantage of consumer inattention.”¹⁴⁸ The court also cited Woodrow Hartzog who coined the phrase “malicious interface” to describe websites that deceive consumers.¹⁴⁹ It is a common law principle that parties should be bound to contracts that they enter into. But Kellman and Specht may suggest that unwitting assent is not assent at all.¹⁵⁰ These concerns are reminiscent of the Step-Saver court’s suggestion that sellers might take advantage of buyers’ reluctance to return a product if they dispute the terms of a shrinkwrap agreement.¹⁵¹

A few cases in the study attempted to provide definitions for various types of browsewrap and utilize appropriate standards of notice. Rabbani v. Tesla Motors described “pure-form browsewrap agreement[s]” as follows: “by visiting the Web site—something that the user has already done—the user agrees to the Terms of Use not listed on the site itself but available only by clicking a hyperlink.”¹⁵² Esparza v. 23andMe Inc. emphasized that an agreement is browsewrap if the offeror “assumes assent based upon the mere use of the website.”¹⁵³ “Website users are entitled to assume that important provisions—such as those that disclose the existence of proposed contractual terms—will be prominently displayed, not buried in fine print.”¹⁵⁴

Generally, when browsewrap agreements contained elements of clickwrap, they were more likely to be enforceable. This was due to the creation of “reasonable notice” through the affirmative act of clicking. Even when terms were hyperlinked or not immediately noticeable, website flows that incorporated an affirmative act on the part of the buyer were enforceable. In Collins v. Priceline, a website’s terms were only visible via a hyperlink but were enforced by the court because the buyer had adequate notice that “[b]y selecting Confirm Your Reservation [they] agree[d] to the Booking Conditions.” ¹⁵⁵ The affirmative act of clicking to move forward with the reservation resembled clickwrap enough for the court to hold the buyer to the terms.¹⁵⁶ Esparza and Collins were consistent with the Berman standard in that they emphasized the importance of an affirmative act, but Esparza did not apply the Berman framework, despite being decided in 2023.

Esparza also used a reasonably prudent user standard to determine whether a buyer had “adequate or constructive notice.” The court examined factors that the Nguyen and Long courts examined, such as “ ‘placement,’ color, and contrast of hyperlinks (i.e., ‘color-contrasting text’) and ‘the website’s general design.’ ”¹⁵⁷ The court in Rabbani v. Tesla Motors, Inc. also mentioned the reasonably prudent user standard but based its determination on the presence of “immediately visible notice,” quoting Specht.¹⁵⁸ Thus, although these cases used many similar standards of notice, they were inconsistent in their approaches to finding reasonable notice.

Overall, the courts were most protective of buyers in cases involving browsewrap agreements, unless the agreements involved an affirmative act of assent. The greater amount of inconsistency was likely due to the variation in what browsewrap agreements look like. Thus, courts looked for elements that resembled clickwrap, leaning on its presumptive enforceability. Courts also used a reasonably prudent user standard to determine whether reasonable notice was present, but there was no predominant standard among browsewrap cases.

3. Sign-In-Wrap Agreements

Sign-in-wrap resembles browsewrap in that it can cause a buyer—who believes they are merely signing up for an account or email list—to unwittingly assent to terms. But sign-in-wrap can also resemble clickwrap in that it can incorporate an affirmative act of assent into the sign-up flow. Courts generally struggled with a consistent treatment for sign-in-wrap and used several standards from browsewrap cases such as the reasonable notice and the reasonably prudent user standard.

A California appellate court was confronted with the issue of a sign-in-wrap agreement for the first time in 2021 in the case Sellers v. JustAnswer LLC.¹⁵⁹ A question-answering website prompted users with a button that read: “Start my trial” and small text below that read: “By clicking ‘Start my trial’ you indicate that you agree to the terms of service and are 13+ years old.”¹⁶⁰ Although the court noted that sign-in-wrap should be enforceable “based on the existence of essentially any textual notice that purports to inform consumers they agree to the terms by signing up for an account,” the court decided that the website’s notice was not “clear and conspicuous,” and the agreement was unenforceable.¹⁶¹ The Sellers court used a reasonableness standard to determine that the website’s notice was insufficient.¹⁶² The factors identified in Nguyen and Long (including text size, text color, text location, proximity to clickable buttons, obviousness of hyperlinks, and “clutter” on the screen) provided a baseline for the factual inquiry.¹⁶³ Additionally, the fact that the user was signing up for a free trial of a service and was not expecting to enter into an ongoing contractual relationship contributed to the lack of conspicuousness.¹⁶⁴ The court quoted Long: “California law is clear—‘an offeree, regardless of apparent manifestation of [their] consent, is not bound by inconspicuous contractual provisions of which [they were] unaware, contained in a document whose contractual nature is not obvious.’ ”¹⁶⁵ This set the stage for Oberstein, which solidified the “context” of a transaction standard that has yet to be embraced.¹⁶⁶

Sellers is also notable for its focus on how an average user or consumer behaves, echoing parts of the opinion from Step-Saver. While the defendant-seller urged the court to set bright-line rules governing sign-in-wrap agreements, the court declined to do so.¹⁶⁷ This was also the case in ProCD, in which Judge Easterbrook did not create specific requirements for sellers’ packaging out of fear of stifling business. The Sellers court commented on trends in online form contracting law, observing that courts have been inconsistent in their conceptualizations of a “typical online consumer.”¹⁶⁸ The court declared that “not all internet users are alike”;¹⁶⁹ some federal courts assume that “ ‘[a]ny reasonably-active adult consumer will almost certainly appreciate that by signing up for a particular service, he or she is accepting the terms and conditions of the provider.’ ”¹⁷⁰ Other Internet users might have “only recently, and perhaps begrudgingly, began to use cell phones, or other internet-enabled devices, for the purpose of online commerce.”¹⁷¹ Thus, federal courts have been inconsistent in their treatment, relying on “subjective criteria” as opposed to the aforementioned factors.¹⁷² An example is a court treating “conspicuousness” as the relevant question of law when it is “actually conducting . . . a fact-intensive inquiry.”¹⁷³ The Sellers court zoomed into the reasonably prudent user standard employed by many courts, setting the stage for Keebaugh.¹⁷⁴

Following the lead of Sellers, other sign-in-wrap cases in the case law survey did not establish or utilize a single standard. Instead, the cases likened sign-in-wrap agreements to browsewrap agreements and applied a broader “actual or constructive notice” standard. In Thompson v. Live Nation Entertainment, for example, the court emphasized the fact that a buyer received more than one opportunity to acknowledge a seller’s Terms of Use, and the use of a different font color for the terms created adequate notice.¹⁷⁵ On one hand, these are commonly examined factors within a notice inquiry. On the other hand, the courts’ decisions about which factors to examine were seemingly arbitrary.

The other case besides Sellers that held for a buyer was O’Connor v. Road Runner Sports, Inc., which turned on the fact that the buyer did not manifest assent because he did not use one of the modes of acceptance established by the seller.¹⁷⁶ The terms and conditions of the loyalty program provided “three ways a customer could manifest his or her assent to be bound: purchasing a membership, using a membership, or renewing a membership.”¹⁷⁷ Instead, the buyer called the seller’s toll-free phone line, so he did not agree to the seller’s terms.¹⁷⁸ As per common law, the offeror is the master of the offer, and in this case, the offeree did not undertake any of the modes of acceptance held out by the offeror.

Given the Sellers decision, California courts have not yet settled on a singular standard for determining whether a sign-in-wrap agreement is enforceable because they have taken varied approaches to assessing adequate notice. Further, Sellers casts doubt on courts’ adherence to so-called objective standards of notice. As the case law survey shows, courts have instead been using somewhat free-flowing, fact-based criteria.

In conclusion, California state courts were relatively consistent in presuming clickwrap agreements to be enforceable but were inconsistent in employing uniform standards of notice in browsewrap and sign-in-wrap cases. Part of the issue was the inability to define certain browsewrap agreements that did not fit cleanly into a single wrap category. Another issue, however, was the courts’ inconsistent application of standards, through which they examined a variety of factors to assess reasonable notice and sometimes relied on a reasonably prudent user or context of the transaction standard. These standards were somewhat selectively employed by the courts in the surveyed cases, which still showed deference to the presumptive enforceability of some agreement types over others.

B. U.S. District Courts in California

This Note examined twenty cases to provide a point of comparison to the state court case survey and to show that recent federal cases in California reach conclusions largely consistent with those of the state courts. Mirroring the state court case law survey, federal cases were chosen based on four criteria: (1) cases arose out of U.S. District Courts from districts in California; (2) cases were decided between the years 2014 and 2024 (inclusive); (3) the relationship between the parties to the case was that of a buyer and seller (or lessee/lessor), or the agreement in dispute arose out of a transaction for goods or services; and (4) the court addressed the validity of a clickwrap, browsewrap, scrollwrap, or sign-in-wrap contract. While the state court case law survey yielded no instances of scrollwrap contracts, this part of the survey will analyze four cases involving scrollwrap, finding that the courts’ conclusions were unsurprising and consistent with the former half of the case law survey. Again, the types of provisions in dispute in these cases were not relevant because the agreement was considered as a whole. Indeed, most of the selected cases involved disputes regarding forum-selection clauses and arbitration clauses.

Three cases contained discussions of the validity of clickwrap agreements, three contained scrollwrap, nine contained browsewrap, and seven contained sign-in-wrap (two browsewrap cases also contained aspects of sign-in-wrap).¹⁷⁹ In each of the cases involving clickwrap or scrollwrap, the court held for the seller. In the browsewrap cases, the court held for the seller in six out of nine instances. In the sign-in-wrap cases, the court held for the seller two out of five times. The ratio of pro-buyer and pro-seller decisions for each type of wrap were not drastically different from those in state courts (see Figure 1, supra). More important than these numbers, however, was the consistency found in the reasoning within the decisions.

The cases largely adhered to the general standards established by pre-Berman Ninth Circuit precedent. Some courts modeled their analysis on the facts of past cases. For example, in Friedman v. Guthy-Renker, the Central District Court of California closely followed the blueprint established in Nguyen in order to determine the validity of a browsewrap agreement.¹⁸⁰ In Peter v. Doordash, Inc., the court compared the actual webpage in question to the webpage in Meyer v. Uber Technologies.¹⁸¹ As was the case in state courts, it still remains to be seen whether the two-part test from Berman or the context of a transaction test will gain traction over time. Cases concerning scrollwrap agreements came out as expected; courts ruled for sellers because scrolling generally constituted an affirmative act of assent. When considering the enforceability of browsewrap or hybridwrap agreements, federal courts favored sellers slightly more than state courts. But overall, these decisions were unsurprising and largely consistent with California state courts.

1. Clickwrap Agreements

The courts followed a deferential presumption of validity when it came to pure clickwrap agreements, and referenced recent decisions in state or other federal courts. In Vanden Berge v. Masanto, the court noted that “[c]lickwrap agreements ‘have been routinely upheld by circuit and district courts.’ ”¹⁸² In Tingyu Cheng v. Paypal, Inc., the court declared that “[c]lickwrap agreements are routinely recognized by courts and are enforceable . . . .”¹⁸³ Determining that an agreement was identifiably clickwrap often ended a court’s inquiry into the agreement’s enforceability. As in state courts, notice was secondary to the presumption of validity.

Overall, there were no federal district court decisions concerning clickwrap that deviated from precedent. As was true in California state court cases, pure clickwrap agreements are still regarded as constituting an affirmative act of assent that binds a buyer.

2. Scrollwrap Agreements

The same consistency was true of cases involving scrollwrap agreements. Like pure clickwrap agreements, scrollwrap requires an affirmative act of assent through the action of physically scrolling down a webpage. However, scrollwrap arguably creates greater notice for a buyer because the entirety of the seller’s terms is built directly into the website flow. When the buyer is forced to acknowledge the entirety of the agreement, it is harder to argue that the buyer did not receive adequate notice. Generally, the discussions of the validity of pure scrollwrap agreements were not accompanied by fact-specific inquiries into the reasonableness of the notice.¹⁸⁴ Courts were simply willing to accept the reasoning found within other binding or persuasive precedent once the type of wrap was established. In 2023, the court in Flores v. Coinbase declared that “ ‘scrollwrap’ agreements are consistently found to be enforceable in California,” referencing Sellers.¹⁸⁵ In Perez v. Bath & Body Works, the court cited the Ninth Circuit in Berman, stating that there is “little doubt” as to the blanket enforceability of scrollwrap agreements because “they affirmatively show the terms to the user before obtaining assent rather than linking to a separate page containing the terms that does not need to be viewed prior to agreement.”¹⁸⁶

Though California state courts have not yet decided any scrollwrap cases, it is likely that those courts would reach similar conclusions. Of all the types of wrap, scrollwrap probably creates the greatest presumption of validity because it requires an affirmative act, and the terms are conspicuous and accessible, by definition.

3. Browsewrap Agreements

In contrast, courts were generally more skeptical of browsewrap agreements because of the passive nature of browsewrap. Some courts even expressed a presumption of invalidity for pure browsewrap agreements.¹⁸⁷ In Brooks v. IT Works Marketing, the court stated that “[i]nternet contracts fall on two ends of a spectrum; courts routinely find clickwrap agreements enforceable but are generally more reluctant to enforce browsewrap agreements.”¹⁸⁸ Moyer v. Chegg quoted Berman: “Courts are more reluctant to enforce browsewrap agreements because consumers are frequently left unaware that contractual terms were even offered, much less that continued use of the website will be deemed to manifest acceptance of those terms.”¹⁸⁹ As the court reasoned in Nguyen, a buyer is not expected to seek out the terms of an agreement and sellers should be responsible for providing notice.¹⁹⁰ Of the cases surveyed, when cases involved a pure browsewrap agreement that contained no elements of clickwrap or sign-in-wrap, the court ruled in favor of the buyer.¹⁹¹ This is consistent with the former part of the case law survey.

Courts’ inquiries became more complicated when browsewrap was combined with elements of clickwrap or sign-in-wrap. Notice of the terms of the agreement was almost always the standard, and courts again examined various factors.¹⁹² In some of the cases examined, the courts did not even deem it necessary to categorize a website as offering one of the four recognized types. Eight out of nine browsewrap cases examined involved a form of hybridwrap, and given the variation in those agreements, the courts utilized a fact-specific inquiry across the board.

Reasonable notice or reasonably prudent user standards were most common. In Friedman v. Guthy-Renker, the court looked for “browsewrap that resemble[d] a clickwrap” because such an agreement would require an affirmative act of assent, evincing notice.¹⁹³ Applying the reasonably prudent user standard adapted from Nguyen, the court held for one of the plaintiff-buyers and found that “a reasonably prudent person would not believe that the common noun ‘terms’ associated with the checkbox [were] the same terms found in the proper noun ‘Terms & Conditions’ at the bottom of the page.”¹⁹⁴ Similarly, in Chien v. Bumble, a “blocker card contain[ed] aspects of both clickwrap and browsewrap agreements” and was “comparable to a pop-up screen in that users must click ‘I accept’ before they may proceed” but needed to click a hyperlink to view the full terms.¹⁹⁵ However, the notice was “reasonably conspicuous,” and the agreement was therefore valid.¹⁹⁶

In Shultz v. TTAC Publishing, a hybrid browsewrap agreement was invalidated because the checkbox next to the statement, “I agree to the terms and conditions,” was already checked by default when a customer navigated to the checkout page; therefore, there was no affirmative act of assent.¹⁹⁷ Nevertheless, the court engaged in a factual inquiry as to whether there was sufficient notice to justify the browsewrap agreement, finding that “the webpage design [made] it exceedingly difficult to discern the significance of the hyperlink.”¹⁹⁸ As was true in state courts, federal courts in California routinely applied similar, yet not identical, standards for notice. In a way, it did not matter that each of these cases involved browsewrap because the courts did not assign much inherent meaning to the category. The importance of browsewrap as a distinct category eroded in the face of many distinct types of hybridwrap.

In one sense, these cases validate the observation of the Sellers court: federal courts have relied on “subjective criteria” as opposed to one consistent version of a reasonable notice standard.¹⁹⁹ That being said, the courts consistently drew from the same pool of examinable factors in evaluating whether adequate notice was given, including fonts, sizes, colors, and proximity to clickable buttons. Generally, like the cases surveyed in Section II.A, federal courts in California preferred to draw on multiple factors and standards used by precedent in assessing notice. A singular, objective standard of reasonable notice thus remains elusive.

4. Sign-In-Wrap Agreements

Like state court cases, federal cases involving sign-in-wrap agreements involved a fact-specific inquiry into the buyer’s experience and did not place much inherent value on the sign-in-wrap category. A fact-based inquiry was typically warranted. Serrano v. Open Road Delivery Holdings cited Sellers, stating,

[I]t is not apparent that the consumer is aware that they are agreeing to contractual terms simply by clicking some other button. Instead, the consumer’s assent is largely passive, and the existence of a contract turns on whether a reasonably prudent offeree would be on inquiry notice of the terms at issue.²⁰⁰

The webpage should have provided “conspicuous notice to permit an inference that the user had manifested assent.”²⁰¹ The court held for the consumer and found that notice was not conspicuous because of the small size of the text informing consumers that they were assenting to the terms of use by signing up.²⁰²

Courts employed a few other means of assessing notice. In addition to performing a broader factors-based inquiry, the court in Peter v. Doordash directly compared a seller’s sign-up page to the page considered by the Second Circuit in Meyer v. Uber Technologies.²⁰³ The court stated that “[t]he screens are similarly uncluttered and wholly visible, and the notice text appears even closer to the sign-up button on DoorDash’s page than on Uber’s.”²⁰⁴ In addition to using a more general standard, the court relied on a side-by-side comparison of two webpages.²⁰⁵ Lastly, the court in Regan v. Pinger declined to settle on a precise label for the sign-in-based agreement and instead looked for broadly “sufficient notice to manifest mutual assent,”²⁰⁶ as was true for some browsewrap cases as well.

Overall, sign-in-wrap cases in federal district courts also applied standards of reasonable notice in an inconsistent manner. Courts employed various techniques, including comparing the webpage in question to webpages from past cases and examining website elements, such as fonts, separately. These cases support the Sellers court’s criticism of the inconsistent application of notice standards in federal courts.

In conclusion, this case law survey reveals consistency with California state courts. Beyond the presumptions of validity for clickwrap and scrollwrap contracts, standards of notice generally became nebulous as courts utilized any combination of website factors as well as other methods such as direct comparisons to websites from previous cases. Both state and federal courts struggled to pinpoint a consistent method of assessing whether reasonable notice was present, and even the reasonably prudent user standard yielded different results depending on how the court chose to define an average user. Thus, federal courts in California were largely consistent with state courts in their treatment of clickwrap, scrollwrap, browsewrap, and sign-in-wrap cases.

C. Summary of Findings

To summarize, this case law survey shows consistency among state and federal courts in California. Courts were generally deferential to sellers and their offers if adequate notice was given to the buyer. This aligns with Judge Easterbrook’s perspective in ProCD. However, California courts also employed a reasonably prudent user standard, which can be traced back to Berman, Specht, and Step-Saver. Finally, this Note concludes by arguing that Step-Saver and ProCD remain relevant as online contracts evolve because they establish and contextualize the most commonly used standards of notice in California. Courts will likely continue to lean on their reasoning in applying common law principles as new types of contracts emerge over time.

1. Standards of Notice

In some clickwrap and scrollwrap cases, courts were willing to declare an agreement valid solely because courts have presumed clickwrap and scrollwrap to be enforceable in the past.²⁰⁷ On the other hand, some courts seemed reluctant to rely on categories at all.²⁰⁸ However, most cases in the case law survey engaged in some level of fact-specific inquiry, and a few main standards were seen most frequently. It remains to be seen whether the two-part standard from Berman or the transactional “context” standard from Oberstein will gain traction in the coming years.

The reasonable notice standard was almost always applied throughout the case law survey. Consistent with the precedent set by Nguyen, Specht, and Berman, courts examined various website design factors such as font size, font color, proximity to clickable buttons, underlining on hyperlinks, and the presence of an affirmative act of assent before completing a transaction.²⁰⁹ Though Nguyen provided some specific rules pertaining to browsewrap,²¹⁰ there is still no requirement that courts examine certain factors or website elements. Perhaps this approach is practical considering the wide variation in sellers’ website flows. However, the looseness of the standard was also a source of inconsistency throughout the survey, and courts created their own interpretations by picking and choosing certain factors to examine.²¹¹

The reasonably prudent user standard was often used with the reasonable notice standard and acted as a loose benchmark for courts analyzing the experience of a consumer engaging with a seller’s interface. Some courts treated it as an independent standard,²¹² while some courts treated is as a subset of reasonable notice.²¹³ The court in Sellers criticized some courts’ exercise of the reasonably prudent user standard as being too subjective and inconsistent.²¹⁴ In considering the potential longevity of this standard, it is difficult to imagine whether the average Internet user of the future will be more or less prudent. Perhaps the average American will be more digitally literate in twenty or fifty years than they are today. Or perhaps technology will continue to evolve, leaving some generations and users behind. Nevertheless, it is certain that sellers and their offers will continue to evolve, causing standards to continue to adapt.

A few other methods of assessing notice were seen in the case law survey. The court in Sellers also wrote that some federal courts were using adjacent, but different, standards to determine whether sufficient notice was present, such as “conspicuousness.”²¹⁵ Conspicuousness was sometimes employed as an independent test, as one of many factors of the reasonable notice standard, and as a separate prong of the Berman test.²¹⁶ Overall, courts have been inconsistent in their application and analysis of conspicuousness. Additionally, some courts decided to forgo tests and standards in favor of making comparisons to websites and agreements that have been seen in courts already. Those decisions focused on the fact that the browsewrap or sign-in-wrap agreement in question resembled a similar agreement in a previous case. For example, the court in Peter v. Doordash compared the seller’s sign-up page to the website in Meyer, stating that “DoorDash’s sign-up page looks markedly similar to the page approved by Meyer. The screens are similarly uncluttered and wholly visible, and the notice text appears even closer to the sign-up button on DoorDash’s page than on Uber’s.”²¹⁷ Comparing agreements to others that have already been “approved” by courts may be temporarily efficient. Looking forward, however, this method may not be sustainable if online agreements continue to evolve at a fast pace. Some legal scholars, including Cheryl B. Preston, are not optimistic about the potential of evolving notice standards to sufficiently protect consumers, especially given the needs of the “Internet-instant-gratification generation.”²¹⁸ Perhaps Judge Easterbrook and the Sellers court were wise in declining to create bright-line rules; standards offer greater flexibility and adaptability to the online contracts of tomorrow.

This Note will not propose what alternative, more successful standards of notice might look like.²¹⁹ However, some other jurisdictions adopt combinations of these tests. Within the last few years, for example, Maine has embraced a “two-step inquiry” in which the first step focuses on a reasonably prudent user being put on reasonable notice of the contract terms, and the second step focuses on whether the user has manifested their assent.²²⁰ Perhaps California courts embrace the Berman standard and the context of the transaction test, which seek to combine many of the standards that have been employed within the past decade. A more uniform standard for notice would create consistency and reduce the current reliance on courts to define the scope of a notice inquiry.

This case law survey shows that a singular notice standard remains to be established in California. While reasonable notice was almost universally considered important, courts created their own interpretations of this standard and applied it in many different ways.

2. The Erosion of Distinct Wrap Categories

The results of this case law survey also show that courts did not always utilize California’s four wrap categories in evaluating the validity of an agreement. While the clickwrap and scrollwrap categories carried presumptions of validity,²²¹ the browsewrap and sign-in-wrap categories lacked definite boundaries and uniform standards of notice. A concurring opinion in Berman made a bold proposition: “browsewrap agreements are unenforceable per se; sign-in wrap agreements are in a gray zone; and clickwrap and scrollwrap agreements are presumptively enforceable.”²²² While this may be true for now, the Berman court’s declaration may lose relevance as soon as wrap contracts further evolve—or devolve.

One issue is that courts were not always consistent in their categorization of wrap agreements. In state and federal courts, there was a struggle to define agreements when they incorporated elements of more than one type of wrap. Some of the decisions labelled by the courts as browsewrap or hybridwrap involved website flows that also directed users to sign-in or create accounts.²²³ Thus, going forward, the wrap categories may only be useful insofar as the courts are consistent in their categorizations. Further, sellers are constantly adapting to standards set by new case law. For example, because Nguyen discouraged the use of a pure browsewrap agreement,²²⁴ sellers have expanded the world of browsewrap to include many hybrid variations. Courts often fail to characterize these agreements in specific or useful ways. For example, the state court case Kellman v. Honest Co. adopted the language used in Long v. Provide Commerce to describe the type of agreement in dispute: browsewrap with “something more.”²²⁵ Not only was this definition of an agreement vague, but it also relied on a clear definition of browsewrap, which may no longer exist.

The fact that courts have recognized new types of wrap in the past may suggest that there is room for further types of agreements in California contract law. However, even if courts were to acknowledge new categories, such a process would likely occur gradually, moving at a speed much slower than the speed at which sellers create new website flows. As mentioned before, courts still take a reactionary, ex ante approach when assessing the validity of an online contract.²²⁶

Looking forward, advances in technology may further blur the lines. Companies today are converting customers by monetizing places that are not traditionally used as marketplaces. “Social commerce,” for example, allows users of social media platforms like Instagram and Facebook to “purchase products without ever leaving the platform.”²²⁷ “Experience commerce” is another new example, promising to put the “customer first” and remove “the product from the center of the sales solution or offering” to create an “immersive . . . experience.”²²⁸ This Note does not speculate extensively about the future of ecommerce, but as Internet users find themselves becoming buyers in new contexts, they probably run a greater risk of assenting to terms unwittingly.

Overall, as sellers continue to adapt to current standards and hybridwrap becomes more pervasive, a fact-specific inquiry tailored to the agreement in question might always be necessary—even for cases involving clickwrap or scrollwrap. Thus, it is also worth considering whether these categorizations remain useful at all. First, there were the “two flavors” of contracts, clickwrap and browsewrap, and today, California courts recognize four. Moving forward, perhaps there will be many more—or none at all. This case law survey shows that the categories are already breaking down as sellers’ websites resist simple categorization. If courts continue to prefer reasonable notice or reasonably prudent user standards, then perhaps hard-and-fast contract categories will cease to be necessary because these standards apply regardless of the wrap type. Browsewrap and sign-in-wrap have arguably already lost their efficacy as distinct categories because there is so much variation among website flows. Indeed, courts sometimes declined to categorize agreements at all and instead prioritized a notice analysis.²²⁹

It is unclear whether the deterioration of wrap categories and emergence of fact-specific inquiries will create more protection for buyers. On the one hand, a fact-specific inquiry could benefit buyers because sellers exercise the most control over their websites. As masters of their own offers, they alone have the power to set the terms of the transaction. As Judge Wisdom suggested in Step-Saver, the fact that there is often no transaction history between parties to these contracts might cause buyers to assent to agreements that they do not anticipate or expect.²³⁰ On the other hand, and as emphasized by Judge Easterbrook in ProCD, the ubiquity of ecommerce and the natural competition of the market may create enough protection,²³¹ even as website flows evolve to become more complex. Although most consumers do not read sellers’ terms, reputation matters in a saturated market and might incentivize sellers to provide more favorable terms. Whether distinct wrap categories have longevity or not, courts likely need to define the appropriate notice standard that should be applied, which could eliminate some of the inconsistency highlighted by the Sellers court.

For now, this case law survey also shows that the four distinct contract categories still center in California courts’ preliminary analysis of the validity of an online contract, though hybridwrap is becoming more pervasive. Courts almost always begin their analysis of an agreement’s enforceability with an acknowledgement of the types of wrap, whether they use the categorization to presume validity or proceed to look for adequate notice by the seller. Because all wrap types can be potentially valid, courts are generally deferential to sellers and how they want to set the terms of their offers. There are still few bright-line requirements for sellers in this area of contract law, and parties are generally free to contract as they please.

3. The Relevance of Step-Saver and ProCD

The precedent set by Step-Saver and ProCD three decades ago is still applicable today. An important part of the ProCD decision was Judge Easterbrook’s adherence to the common law principle that any mode of acceptance set by an offeror—hence, any type of wrap—is valid as long as the buyer has notice. The offeror is the master of the offer and can propose specific modes of assent. The reasonable notice standard used widely in California is consistent with Judge Easterbrook’s determination that ProCD’s pop-up box gave the buyer enough notice of the seller’s agreement.²³² Many of the cases surveyed also prioritized the experience of buyers as part of an analysis of adequate notice. Relatedly, the reasonably prudent user standard can be traced to Step-Saver and Specht. It forces sellers to acknowledge the other party in designing an offer and work around the experience of the buyer or user. Perhaps this amounts to more protection for buyers. In some cases, the court went so far as to insinuate that sellers take advantage of buyers in formulating their modes of acceptance.²³³ Yet, this case law survey also shows that the ProCD and Step-Saver perspectives are not incompatible. Elements of both cases have made their way into California contract law, though Judge Easterbrook’s approach seems to be slightly more pervasive today.

Step-Saver and ProCD are often seen as cases that are pro-buyer or pro-seller. Step-Saver was largely concerned with holding businesses accountable and is an important check on sellers. In contrast, Eric Posner termed ProCD a “masterpiece of realist judging” in the “canon of contract law cases” because it encouraged sellers to continue conducting business as they had been.²³⁴ However, given the landscape of online contracting and the importance of notice, perhaps the cases should be recast as simply endorsing different standards of notice. Step-Saver is more aligned with the reasonably prudent user standard while ProCD is more aligned with reasonable notice. Online contract cases today implicitly recognize that form contracts enable the marketplace to function efficiently. Yet, because online sellers’ website flows vary to such a great degree, it is difficult to make blanket statements as to the validity of certain agreements. Thus, notice will almost certainly remain a point of discussion for courts, and these cases will remain relevant as the sources of two significant standards of notice.

The world of online contracting is quickly outpacing the factual relevance of the two cases because new means of manifesting assent are rapidly being invented. For example, the box-top licenses in Step-Saver and ProCD can be likened to browsewrap agreements today, but many sellers have already stopped creating pure browsewrap agreements after Nguyen. While form contracts will likely remain important and necessary for online contracting, current shrinkwrap-like modes of acceptance may not. Nevertheless, these cases connect the concept of notice in form contracts to essential contract common law principles. As long as online modes of contracting are held to the same requirements of offer and acceptance, the reasoning of Judge Wisdom and Judge Easterbrook should remain in contract casebooks. These two cases contributed to the development of major standards of notice.

CONCLUSION

As was true three decades ago when Step-Saver and ProCD created a circuit split, courts are still determining how to evaluate notice when considering the validity of form contracts. When courts evaluate the validity of a clickwrap or scrollwrap agreement, precedent alone may dictate a certain outcome. For cases involving browsewrap or sign-in-wrap, a fact-specific inquiry is almost always necessary. While it remains to be seen whether California’s four types of wrap will continue to be useful or important in evaluating sellers’ offers and agreements, it is likely that courts will continue to look for adequate notice. This case law survey demonstrates that there are two main standards of notice that can be traced back to ProCD and Step-Saver: a factor-based reasonable notice standard and a reasonably prudent user standard. There is presently no uniform method of applying these standards in California, but most courts nevertheless acknowledge that elements of both are important. Overall, case law is trending towards the ProCD view that contracting should not be impeded by burdensome standards for sellers. However, sellers should still be held to reasonable standards to keep consumers informed, which is consistent with Step-Saver. In conclusion, these two cases remain important as courts continue to evaluate whether buyers were sufficiently notified of sellers’ terms.

APPENDIX A. Surveyed Cases in California State Courts
	Case	Held For	Type of Contract	Disputed Terms	Summary
1	B.D. v. Blizzard Ent., Inc., 292 Cal. Rptr. 3d 47 (Ct. App. 2022)	Seller	Clickwrap	Arbitration Provision	Seller’s pop-up box gave sufficiently conspicuous notice that clicking a “Continue” button would manifest assent to the terms of a License Agreement.
2	Bowers v. Ritchie Bros., No. RG21095426., 2021 Cal. Super. LEXIS 33293 (Aug. 18, 2021)	Seller	Clickwrap	Forum-Selection Provision	Buyer assented to an agreement by clicking “I agree to the IronPlanet Buyer Terms and Conditions,” which was necessary to proceed with the transaction.
3	Doe v. Massage Envy Franchising, LLC, 303 Cal. Rptr. 3d 269 (Ct. App. 2022)	Buyer	Clickwrap	Arbitration Provision	Buyer brought an action for sexual assault, to which a seller moved to compel arbitration based on a clause in seller’s agreement. Buyer did not assent to a seller’s terms of service on an electronic tablet because the font color of the notice statement was not conspicuous, and terms were hyperlinked. Buyer was pressured to complete the forms quickly by seller’s staff.
4	Herzog v. Superior Ct., 321 Cal. Rptr. 3d 93 (Ct. App. 2024)	Buyer	Clickwrap	Arbitration Provision	Buyer assented to a healthcare company’s terms by clicking a box, but the agreement was deemed unenforceable because clicking the box also constituted authorization for the company to collect and store the personal health information; thus, there was no unambiguous assent to the terms.
5	Jackson v. Vines, No. CVRI2201731, 2023 Cal. Super. LEXIS 69073 (Jan 10, 2023)	Seller	Clickwrap	Arbitration Provision	Buyer assented to terms via a clickwrap agreement and could not use the fact that he did not recall doing so as a defense.
6	Njoku v. Airbnb, Inc., No. 21STCV34610, 2021 Cal. Super. LEXIS 84568 (Dec. 23, 2021)	Seller	Clickwrap	Arbitration Provision	Buyers were bound by an agreement because they clicked an electronic button that indicated their assent, even though the actual terms were hyperlinked and on another page.
7	Pierre v. Dexcom Inc., No. 37-2023-00014471, 2023 Cal. Super. LEXIS 56618 (July 28, 2023)	Seller	Clickwrap	Arbitration Provision	Buyer was bound by a clickwrap agreement that read “I agree” or “I accept” and was provided with a link to the readily available agreement.
8	Shaw v. U-Haul, No. 21STCV20248, 2022 Cal. Super. LEXIS 23561 (Mar. 16, 2022)	Seller	Clickwrap	Arbitration Provision	Buyer manifested assent by clicking “Accept” with respect to seller’s Arbitration Agreement.
9	Xiong v. Jeunesse Glob., LLC, No. 30-2019-01095448, 2020 Cal. Super. LEXIS 5220 (Oct. 6, 2020)	Seller	Clickwrap	Arbitration Provision	Buyer was bound by a clickwrap agreement that read “I agree,” and her inability to remember whether she clicked the box was an insufficient defense.
10	Blood v. L.T.D. Commodities LLC, No. 37-2020-00034050, 2021 Cal. Super. LEXIS 56220 (Sept. 24, 2021)	Buyer	Browsewrap	Arbitration Provision	A button on seller’s website that read “START SAVING” did not notify buyer that clicking the button would constitute assent to seller’s terms.
11	Collins v. Priceline.com, LLC, No. 20STCV10231, 2020 Cal. Super. LEXIS 5739 (Dec. 22, 2020)	Seller	Browsewrap	Arbitration Provision	Seller’s website contained an enforceable part-browsewrap, part-clickwrap agreement because buyer had to click to assent and complete a reservation.
12	Esparza v. 23andMe Inc., No. 37-2022-00051047, 2023 Cal. Super. LEXIS 54347 (July 21, 2023)	Buyer	Browsewrap	Arbitration Provision	A website’s terms of use were not binding because they were only available by clicking a hyperlink after scrolling to the bottom of the page or in the site’s chat feature.
13	Kellman v. Honest Co., No. RG16 813421, 2016 Cal. Super. LEXIS 20519 (Nov. 28, 2016)	Buyer	Browsewrap/ Hybridwrap	Arbitration Provision	Seller’s website design did not include design elements that would put a reasonably prudent buyer on notice of a browsewrap agreement.
14	Long v. Provide Com., Inc., 200 Cal. Rptr. 3d 117 (Ct. App. 2016)	Buyer	Browsewrap	Arbitration Provision	Seller’s checkout flow did not create adequate notice that placing an order indicated acceptance, nor did a link sent to buyer’s email create notice.
15	Pradmore v. J2 Glob., Inc., No. CGC-17-561916, 2018 Cal. Super. LEXIS 739 (Apr. 20, 2018)	Seller	Browsewrap/ Hybridwrap	Arbitration Provision	Seller’s agreement was enforceable because it contained elements of browsewrap but also required buyer to click a box to assent to complete a transaction.
16	Rabbani v. Tesla Motors Inc., No. 37-2021-00004478, 2021 Cal. Super. LEXIS 56460 (May 21, 2021)	Seller	Browsewrap	Arbitration Provision	Buyer was notified that placing an order would indicate assent to seller’s terms and did not click on hyperlinks that would have revealed said terms.
17	O’Connor v. Rd. Runner Sports, Inc., 299 Cal. Rptr. 3d 785 (Ct. App. 2022)	Buyer	Sign-In-Wrap	Arbitration Provision	In manifesting assent to cancel his membership to a seller’s loyalty program, buyer did not use seller’s preferred method to cancel the membership and seller’s arbitration agreement was found to be unenforceable.
18	Sellers v. JustAnswer LLC, 289 Cal. Rptr. 3d 1 (Ct. App. 2021)	Buyer	Sign-In-Wrap	Arbitration Provision	A sign-in-wrap agreement was not binding when buyer signed up for a free trial of a service because notice was not clear and conspicuous, and this was not the type of transaction that would entail an ongoing contractual relationship.
19	Skurskiy v. Neutron Holdings, Inc., No. 19STCV36846,Cal. Super. LEXIS 104325 (Cal. Super. Ct. Apr. 15, 2021)	Seller	Sign-In-Wrap	Arbitration Provision	In signing up for a seller’s service, buyer clicked an “I Agree” button where language on the page was apparent that clicking would indicate assent to seller’s user agreement.
20	Thompson v. Live Nation Ent., No. 30-2018-00976153, 2018 Cal. Super. LEXIS 42847 (May 4, 2018)	Seller	Sign-In-Wrap/Browsewrap	Arbitration Provision	Buyer was required to acknowledge seller’s terms twice in the process of creating an account and therefore assented. Key terms were set apart in a different color from other words.

APPENDIX B. Surveyed Cases in U.S. District Courts in California
	Case	Held For	Type of Contract	Disputed Terms	Summary
1	Brown v. Madison Reed, Inc., No. 21-cv-01233, 2021 U.S. Dist. LEXIS 164002 (N.D. Cal. Aug. 30, 2021)	Seller	Clickwrap	Arbitration Provision	Buyer was bound by seller’s agreement because notice of the terms was set apart in bold and in a different color. Clicking to manifest assent was required to place an order.
2	Tingyu Cheng v. Paypal, Inc., No. 21-cv-03608, 2022 U.S. Dist. LEXIS 7245 (N.D. Cal. Jan 13, 2022)	Seller	Clickwrap	Arbitration Provision	Seller’s agreement was binding on buyer because he had to check a box indicating that he had read and agreed to a User Agreement and clicked a large blue button to indicate assent to creating an account.
3	Vanden Berge v. Masanto, No. 20-cv-00509, 2020 U.S. Dist. LEXIS 261762 (S.D. Cal. Sept. 22, 2020)	Seller	Clickwrap	Arbitration Provision	Buyer was bound by seller’s terms because she affirmatively agreed to a clickwrap agreement while making a purchase.
4	Flores v. Coinbase, Inc., No. CV 22-8274, 2023 U.S. Dist. LEXIS 90926 (C.D. Cal. Apr. 6, 2023)	Seller	Scrollwrap	Arbitration Provision	Seller’s scrollwrap agreement was valid because the full text of the User Agreement was placed before buyer.
5	Perez v. Bath & Body Works, LLC, No. 21-cv-05606, 2022 U.S. Dist. LEXIS 116039 (N.D. Cal. June 30, 2022)	Seller	Scrollwrap	Arbitration Provision	Seller’s agreement was valid because buyer was physically required to scroll through the terms in order to assent.
6	Stewart v. Acer Inc., No. 22-cv-04684, 2023 U.S. Dist. LEXIS 10241 (N.D. Cal. Jan. 20, 2023)	Seller	Scrollwrap	Arbitration Provision	Seller’s agreement was enforced because the terms appeared after turning on the product (a computer) and constituted adequate notice.
7	Allen v. Shutterfly, Inc., No. 20-cv-02448, 2020 U.S. Dist. LEXIS 167910 (N.D. Cal. Sept. 14, 2020)	Seller	Browsewrap/ Hybridwrap	Arbitration Provision	Buyer was bound by a browsewrap agreement where constructive notice was present due to the conspicuousness of the terms, although they were hyperlinked.
8	Brooks v. IT Works Mktg., No. 21-cv-01341, 2022 U.S. Dist. LEXIS 103732 (E.D. Cal. June 9, 2022)	Buyer	Browsewrap	Arbitration Provision	Buyer was not bound by seller’s terms because she never saw the link to the Terms of Use as they were in a small font and an inconspicuous color.
9	Chien v. Bumble Inc., 641 F. Supp. 3d 913 (S.D. Cal. 2022)	Seller	Browsewrap/ Hybridwrap	Arbitration Provision	Buyer was bound by seller’s agreement because a pop-up blocker card containing the Terms and Conditions and a button stating “I accept” was reasonable notice.
10	Crawford v. Beachbody, LLC, No. 14cv1583, 2014 U.S. Dist. LEXIS 156658 (S.D. Cal. Nov. 5, 2014)	Seller	Browsewrap/ Hybridwrap	Forum-Selection Provision	An enforceable agreement was made because seller’s Terms and Conditions were in a conspicuous font directly below the “PLACE ORDER” button to complete the transaction.
11	DeVries v. Experian Info. Sols., Inc., No. 16-cv-02953, 2017 U.S. Dist. LEXIS 26471 (N.D. Cal. Feb. 24, 2017)	Seller	Browsewrap/ Hybridwrap	Arbitration Provision	Seller’s browsewrap agreement was valid because there was adequate notice when the phrase “Terms and Conditions” was in a different color and in close proximity to a clickable button.
12	Friedman v. Guthy-Renker LLC, No. 14-cv-06009-, 2015 U.S. Dist. LEXIS 24307 (C.D. Cal. Feb. 27, 2015)	Buyer	Browsewrap/ Hybridwrap	Arbitration Provision	Buyer was not bound by seller’s terms and conditions because the hyperlink to the terms was “buried” at the bottom of the screen and not enough notice was provided of their existence.
13	Hansen v. Ticketmaster Ent., Inc., No. 20-cv-02685, 2020 U.S. Dist. LEXIS 233538 (N.D. Cal. Dec. 11, 2020)	Seller	Browsewrap/ Sign-In-Wrap	Arbitration Provision	Seller’s browsewrap agreement was valid because assenting to terms was required before buyer had the option to purchase tickets from seller.
14	Moyer v. Chegg, Inc., No. 22-cv-09123, 2023 U.S. Dist. LEXIS 128352 (N.D. Cal. July 25, 2023)	Seller	Browsewrap/ Sign-In-Wrap	Arbitration Provision	Buyer was bound because she received conspicuous notice of the terms, which were hyperlinked right below a button that buyer needed to click to create an account.
15	Shultz v. TTAC Publ’g, LLC, No. 20-cv-04375, 2020 U.S. Dist. LEXIS 198834 (N.D. Cal. Oct. 26, 2020)	Buyer	Browsewrap/ Hybridwrap	Arbitration Provision	Buyer was not bound by seller’s browsewrap/clickwrap agreement because the checkbox next to the statement “I agree to the terms and conditions” was checked by default, requiring no act of assent by the user.
16	Colgate v. Juul Labs, Inc., 402 F. Supp. 3d 728 (N.D. Cal. 2019)	Buyer	Sign-In-Wrap	Arbitration Provision	Seller’s notice was not conspicuous enough to notify buyer because the hyperlink to the Terms and Conditions was not underlined, italicized, or visually distinct from the surrounding text.
17	Seneca v. Homeaglow, Inc., No. 23-cv-02308, 2024 U.S. Dist. LEXIS 33698 (C.D. Cal. Feb. 7, 2024)	Buyer	Sign-In-Wrap	Arbitration Provision	Seller’s sign-in-wrap agreement was not binding on buyer because buyer had already purchased services from seller when the agreement was presented, and the notice was not conspicuous.
18	Peter v. Doordash, Inc., 445 F. Supp. 3d 580 (N.D. Cal. 2020)	Seller	Sign-In-Wrap	Arbitration Provision	Seller’s agreement was notably similar to the agreement in Meyer and the notice text was conspicuous. Thus, the agreement was binding on buyer.
19	Regan v. Pinger, Inc., No. 20-CV-02221, 2021 U.S. Dist. LEXIS 33839 (N.D. Cal. Feb. 23, 2021)	Seller	Sign-In-Wrap	Arbitration Provision	Seller’s repeated notice that the creation of an account would constitute assent to the Terms of Service was enough to bind a user.
20	Serrano v. Open Rd. Delivery Holdings, Inc., 666 F. Supp. 3d 1089 (C.D. Cal. 2023)	Buyer	Sign-In-Wrap	Arbitration Provision	Seller’s webpage did not provide reasonably conspicuous notice of the terms and conditions because the notice text was small and in a light-colored font.

98 S. Cal. L. Rev. 419

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Sophie Lee*

* Executive Membership Editor, Southern California Law Review, Volume 98; J.D. Candidate 2025, University of Southern California Gould School of Law; B.A. History, Creative Writing 2022, Columbia University. Thank you to Professor Jonathan Barnett and Professor Jordan Barry for the thoughtful feedback and to my friends and family for their consideration and acceptance.

The Case Against Equity in American Contract Law – by JODY P. KRAUS & ROBERT E. SCOTT

February 2021February 2021Southern California Law Review Admin

Article | Contract Law
The Case Against Equity in American Contract Law

by Jody P. Kraus* & Robert E. Scott†

Vol. 93, No.6 (February 2021)
93 S. Cal. L. Rev. 1323 (2020)

Keywords: Contract Law, Equity, Ex Post Perspective

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Abtract

The American common law of contracts appears to direct courts to decide contract disputes by considering two opposing points of view: the ex ante perspective of the parties’ intent at the time of formation, and the ex post perspective of justice and fairness to the parties at the time of adjudication. Despite the black letter authority for both perspectives, the ex post perspective cannot withstand scrutiny. Contract doctrines taking the ex post perspective—such as the penalty, just compensation, and forfeiture doctrines—were created by equity in the early common law to police against abuses of the then prevalent penal bond. However, when the industrial revolution pushed courts to accommodate fully executory agreements, and parties abandoned the use of penal bonds, the exclusively ex ante focus of the new contract law that emerged rendered the ex post doctrines obsolete. While initially intended to do justice between the parties, if used today these doctrines perversely and unjustly deny parties contractual rights that were bargained for in a free and fair agreement. Yet judges continue to recognize the ex post doctrines, even as they struggle to reconcile them with respect for the parties’ intent. Although infrequently applied, the ex post doctrines are far from dead letter. The penumbra of uncertainty they cast over contract adjudication continues to undermine contracting parties’ personal sovereignty. The only case for continuing to recognize these equitable interventions, therefore, must turn on whether they serve a new valid purpose. We consider and reject the possible purposes of paternalism and anti-opportunism suggested by contemporary pluralist scholars. In our view, the criteria governing theories of legal interpretation support the interpretation of contract law as exclusively serving personal sovereignty rather than any pluralist interpretation. Under its best interpretation, contract law has no place for the ex post perspective.

___________________

*. Patricia D. & R. Paul Yetter Professor of Law and Professor of Philosophy, Columbia Law School, and Co-Director, Center for Law and Philosophy, Columbia Law School.

†. Alfred McCormack Professor of Law and Director, Center for Contract and Economic Organization, Columbia Law School. We are grateful for comments on earlier drafts of this Article from Charles Fried, Michael Gilbert, Mitu Gulati, Hanoch Dagan, Ethan Leib, Paul Mahoney, Alan Schwartz, George Triantis, David Waddilove and participants at faculty workshops at Columbia Law School and the University of Virginia Law School and the 2019 North American Workshop on Private Law Theory VII, University of Western Ontario.

Bluffing in Business-to-Business Contract Negotiations – Article by Stefanie Jung

May 2019October 2019Southern California Law Review Admin

From Volume 92, Number 4 (May 2019)
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Bluffing in business-to-business contract negotiations

The relationship between moral intuition, Rechtsgefühl, and the law in the United States and Germany

Stefanie Jung [*]

Introduction

Bluffing, deceptions, lies and misrepresentations [1] are ubiquitous parts of business-to-business (“B2B”) contract negotiations.[2] The literature on negotiations even explicitly proposes corresponding negotiation tactics and considers bluffing an essential skill of a good negotiator.[3] This Article investigates the relationship between the following four topics with regard to lies in B2B contract negotiations:[4]

(1) the ideas of traditional moral philosophers;

(2) people’s actual moral intuition;

(3) people’s sense of how the law should be, or, in German the “Rechtsgefühl.”[5] More specifically, this concerns people’s belief regarding the question of whether legal consequences should be ordered. This then reveals their “Rechtsgefühl” since there are only legal consequences for unlawful behavior; and lastly

(4) the law—the actual legal situation—in the United States and Germany.

Put simply, the relationship between the aforementioned four aspects is as follows: Many traditional moral philosophers—from Aristotle to St. Augustine and from Thomas Aquinas to Immanuel Kant—strictly reject almost any forms of lies. However, the results of an internationally conducted survey [6] on people’s actual moral intuition demonstrate that the survey participants from Germany and the United States do not share the same ideas as these philosophers. In fact, the respondents in both countries are more lenient with respect to bluffs and lies in negotiations. The latter is confirmed by the fact that the majority of the respondents classify several lies as morally acceptable. To a certain extent, participants do not even condemn so-called “harmful lies.” Hence, the moral intuition of people living in the United States and Germany in this day and age differs significantly from the ideas of traditional moral philosophers.

Most importantly, the study also investigates people’s Rechtsgefühl (sense of how the law should be) and reveals clearly detectable differences between the participant’s moral intuition and their Rechtsgefühl. People who assess a certain behavior as immoral do not necessarily also believe that this behavior should be unlawful. In fact, in only a few cases do the majority of U.S. and German respondents favor having legal consequences. Altogether, this Article promotes the idea that closer attention should be placed on the Rechtsgefühl. Likewise, the Rechtsgefühl should be clearly distinguished from people’s individual moral intuition as the two aspects do not necessarily go hand–in–hand. In this Article, it is presumed that, instead of only emphasizing the relationship between morality (in the form of moral-philosophical ideas and people’s moral intuition) and the law, it is worthwhile to put more emphasis on the relationship between people’s Rechtsgefühl and the law. In general, both aspects should not drift too far apart. Hence, this Article defends the idea that the Rechtsgefühl should have a stronger effect on the law dealing with bluffs in contract negotiations compared to moral-philosophical concepts and people’s moral intuition. Moral intuition and moral-philosophical concepts regularly go beyond the Rechtsgefühl, and the study shows that people do not believe that those stricter concepts and intuition should be translated one-to-one into law.

According to the ideas put forward here, the law in Germany and the law in the United States should be alike, as the Rechtsgefühl is similar in both countries. Surprisingly, however, German and U.S. law show significant differences. In fact, only U.S. law largely corresponds with the Rechtsgefühl and is therefore in line with the theory put forward here. German law, in contrast, neither corresponds with people’s prevalent moral intuition nor with their stated Rechtsgefühl but goes beyond both of these concepts. German law rather reflects the ideas of traditional moral philosophers as it deems almost all lies unlawful. This conclusion is also astonishing from a legal-historical perspective because German law is rooted in Roman law, which distinguished lawful from unlawful forms of deception. But what caused German law to develop away from the initial Roman legal approach and to diverge from U.S. law, even though the moral intuition and the Rechtsgefühl are similar in the two countries? Different general values and legal differences in related areas in the United States and Germany partly explain the current legal divergence of German law from Roman and U.S. law. In addition, this Article argues that the German legislature was influenced by the concepts of moral philosophy.[7] In particular, this Article promotes the idea that Kant’s moral–philosophical ideas played a significant role in shaping German law, since they influenced important legal scholars like Friedrich Carl von Savigny. Moreover, the current legal interpretation in Germany has its origins in the fact that a differentiation of lies is renounced while a discussion on lies that do not concern the subject matter of the contract (“Leistungsgegenstand”) has not been initiated.

In conclusion, this Article encourages a thorough reflection of the relationship between the Rechtsgefühl and the law. In particular, it is explored whether German law should leave room to consider at least some bluffs in contract negotiations as lawful in order to better reflect people’s Rechtsgefühl.

I. Moral Intuition and Rechtsgefühl in the United States and Germany

A. International Study on Lies in Contract Negotiations

The international study on lies in contract negotiations referred to in this Article was conducted with the cooperation of Professor Peter Krebs of the University of Siegen. As of now, 1,896 participants from thirteen different countries,[8] including Germany and the United States, have filled out a questionnaire on the topic, each in their mother tongue. The study distinguishes between four different target groups: judges, lawyers, professional negotiators, and students. In Germany, answers from all four groups were gathered.[9] In the United States, lawyers and students participated.[10] An extensive analysis of the data will be published soon. As a preliminary overview, this Article only presents a few initial findings of the analyzed data gathered from the United States and Germany.

The questionnaire describes nine different scenarios in which one party of a business-to-business negotiation deceives the other party.[11] The lies range from simple bluffs (in other words, bluffs about a better offer, product availability, internal company policies, deadlines, personal preferences, and reservation price) to more severe deceptions (namely, deceptions about the subject matter of the contract itself and the legal situation).[12] All scenarios in the questionnaire are constructed in such a way that one side deliberately deceives the other party. Further, the other party is actually deceived and demonstrably relies on the information provided in the lie. Lastly, there is also a definite causal link between the deception and the conclusion of the contract.[13] The participants are then asked whether they consider the behavior of the lying party to be either morally acceptable or morally unacceptable (moral intuition). In a second step, the respondents are invited to state their individual opinion on whether the deceived business partner should be entitled to rescind the contract or not.[14] In this regard, the second question is not directed towards inquiring the factual legal situation, but which consequence the participants would personally favor. They are thus supposed to state their own beliefs about an entitlement to rescind the contract, specifically assessing whether a rescission should be among the available options to legally address deceptions. At the same time, this questioning method is designed to reveal their Rechtsgefühl because legal consequences only exist for unlawful behavior. The study deliberately refrains from directly inquiring about the Rechtsgefühl (for instance, there are no questions such as “Do you think this behavior should be lawful or unlawful?”) as this would be too abstract. Instead, the chosen type of question intends to exclude the possibility that the respondents confuse unlawfulness with morality. Most respondents find it easier to form an opinion on a somewhat more specific aspect. Explicitly differentiating the questions about morality and the Rechtsgefühl allows the participants to draw clear lines between these two terms. In order to avoid distorted results, the survey’s design enables the respondents to take on the role of a neutral observer.[15]

B. Preliminary Results with Regard to the United States and Germany

First of all, the study’s results emphasize that the moral assessment of the participants is not in accord with the ideas of many traditional philosophers.[16] For example, Aristotle, St. Augustine, Thomas Aquinas, and Kant condemn almost all forms of lies.[17] Their views on deception are also shared by some modern thinkers.[18] However, the participants of the study are more permissive when it came to lying. Even when regarding a lie about the subject matter of the contract, the seemingly “most reprehensible” form of deception the survey has investigated, some participants state that they would assess this behavior as morally acceptable.[19] In four out of the nine scenarios in the survey, a majority of U.S. lawyers and students and German students consider the presented lies to be moral. A majority of German judges deem five out of the nine scenarios to be “morally acceptable” deceptions. German lawyers and professional negotiators even state this view in seven out of nine cases. As a matter of fact, the study illustrates that people, to a certain extent, accept so-called “harmful lies,”[20] or in other words, lies that cannot be excused or justified on the grounds that they are somehow favorable, or at least neutral, from the point of view of the deceived party.[21]

The moral assessment varies depending on the viewed group (judges, lawyers, professional negotiators, or students). In a direct comparison of German and U.S. lawyers, the results indicate that, on average, U.S. lawyers appear to hold higher moral standards. This may be due to ethics courses which are commonly offered at American universities [22] and may also be a consequence of the Model Rules of Professional Conduct that U.S. lawyers must study and follow.[23] Moreover, this may be linked to the clear differentiation of “good” and “bad” moral behavior in the everyday lives of U.S. citizens. With regard to the Rechtsgefühl, the observed differences between U.S. and German lawyers were overall less pronounced.

The study also shows that distinguishing between moral intuition and the Rechtsgefühl is indispensable, because the answers vary significantly in that respect. This applies to all surveyed groups in Germany and the United States as well as equally to all other studied countries. With regard to clear-cut examples, such as lies about the subject matter of a contract and the reservation price, the moral assessment and the Rechtsgefühl still go hand-in-hand.[24] However, in some cases, people assess a lie as immoral, yet simultaneously do not favor ordering legal consequences. For example, such a distinction is made with regard to bluffs about product availability. In this case, 85% of American lawyers consider such a lie to be immoral, but only 15% favor ordering legal consequences. Similarly, moral intuition and the Rechtsgefühl also do not go hand-in-hand with regard to lies concerning another offer.

An initial analysis of the data also demonstrates that the given answers on the moral assessment can only partly explain the Rechtsgefühl. However, if respondents consider a behavior morally acceptable, they generally do not favor ordering any legal consequences. In contrast, the fact that the participants assess a certain behavior as immoral does not directly allow one to draw conclusions on their Rechtsgefühl. Hence, people do not believe that everything that is immoral should necessarily also be unlawful. They rather opt for differentiating between morality and law. People generally favor law provisions that set a standard below the standard of appropriate moral behavior. Viewing morality and the legal situation should thus be complemented by viewing the Rechtsgefühl.[25] This applies all the more, since opinions on how the law should be (Rechtsgefühl) vary less between the groups than is the case for people’s moral intuition.

With regard to the different deceptions, the preliminary results draw the following picture: bluffs about personal preference (for example, bluffs about a party’s favorite football or soccer team) are seen as morally acceptable by the majority of the participants. In line with that assessment, the participants do not favor legal consequences for those lies. The same applies for bluffs about deadlines and budget limitations. In the case of such bluffs, moral intuition and the Rechtsgefühl go hand-in-hand. In contrast, lies about the subject matter of the contract are seen as morally unacceptable by the majority of respondents. In such cases the respondents advocate for legal consequences. The survey also includes a question, setting a scenario, where one party presents a lawful behavior as illegal in order to block demands by the other side. Besides the lie about the subject matter of the contract, this is the only deception scenario, where across all surveyed groups a majority favors a right of the deceived party to rescind the contract. In line with this, a majority in all surveyed groups also assesses these kinds of lies as immoral.

Regarding bluffs on internal company policies and guidelines, opinions vary. More than half of the questioned German students (59.4%), American students (52.9%), and U.S. lawyers (56%) assess the behavior as immoral as opposed to the German professional negotiators, where only 13% classify this behavior as immoral. Similarly, German lawyers and judges do not view these kinds of lies as particularly problematic.[26] For the German students, the results allow the assumption that the moral assessment also influences the Rechtsgefühl, since almost 47% support the option of challenging the contract. For U.S. students, the percentage is a bit smaller (35.6%). The same is true for U.S. lawyers (33%). Among the professional negotiators, lawyers, and judges from Germany, there is a near–consensus about the fact that this kind of deception should not entitle the deceived party to challenge the contract.[27]

Lying about another offer that is in fact non-existent is also assessed diversely by the participants. The majority of the students from both countries (71.2% from the United States and 60.1% from Germany) as well as a majority of the German judges (69%) and U.S. lawyers (80%) assess the tactic as immoral. Among German lawyers and professional negotiators, however, only a minority of the participants classify the behavior as morally unacceptable (48% of German lawyers, 36% of German professional negotiators). Regarding the Rechtsgefühl, the observed discrepancies are smaller. In none of the questioned groups does a majority favor the option of challenging the contract. The proponents of legal consequences fluctuate between 14% (German professional negotiators) and round about 44% (U.S. students).

Regarding lies on the availability of a product, the results are similar. In all groups, the majority of questioned participants view this kind of deception as immoral (for example, 54% of German judges and 85% of U.S. lawyers), with the exception of German professional negotiators (24%) and German lawyers (45%). In no group does a majority support the right to rescind the contract.

Overall, the results illustrate that there are different views about the Rechtsgefühl depending on a person’s profession or nationality. In contrast to the variations of the moral assessment, variations regarding the Rechtsgefühl do not, however, change the overall majority (in other words, as for the result for a specific question, the majority in all groups either favors or objects to legal consequences). This further indicates the importance of the Rechtsgefühl regarding law. The Rechtsgefühl in the context of lies in contract negotiations also derives its importance from the fact that all business participants can generally put themselves in the position of both sides (either the party experiencing the bluff or the party that conducts the bluff). Thus, the evaluation is carried out from a rather neutral perspective, which probably leads to a “balanced” view. German negotiators, especially, seem to consider that they occasionally use bluffs during negotiations, which leads them to hold a more “generous” view on this matter.

Above all, it should be noted that the international study confirms that Germany and the United States are relatively similar as to their results regarding moral intuition and the Rechtsgefühl. The differences with regard to results from other countries are generally greater.[28] The following table ranks the U.S. and German students’ responses to the nine scenarios of the questionnaire. The answers are ranked from most immoral to least immoral and high results in favor of rescission to low results in favor of rescission:

If the Rechtsgefühl is similar in both countries and the actual usage of such lies is approximately equal as well (as it can be initially assumed at this instance), it seems apt to infer a similar legal situation because it is difficult for any legal order to set rules contrary to a consistent Rechtsgefühl (and the actual practice).[29] Hence, it is interesting to discuss whether the observed similarities between Germany and the United States, as well as the distinction between moral intuition and Rechtsgefühl, are reflected in the actual legal situation.

II. The Legal Situation in the United States and Germany

A. The United States

1. Applicable Law

Lies in contract negotiations have diverse facets and are regulated by different sets of rules. In B2B contract negotiations, however, the concept of misrepresentation is essential.[30] The following part primarily analyzes the Restatement of Contracts’ view of misrepresentations since the Restatement attempts to illustrate the legal state with all of its essential elements in simple terms. In addition, the basic differences to the Restatement of Torts on misrepresentation are outlined, and relevant case law will be discussed.

2. Misrepresentation According to the Restatement of Contracts and the Restatement of Torts

In general, the rescission of a contract is subject to four prerequisites.[31] First and foremost, a misrepresentation must be given. A misrepresentation requires “an assertion that is not in accord with the facts.”[32] Rescissions based on misrepresentations of opinion, matters of law, or intentions are subject to major restrictions.[33]

In addition, the misrepresentation has to be either fraudulent or material to grant the deceived party the right to rescind the contract.[34] This Article only addresses deceptions that are to be classified as fraudulent misrepresentations.[35] According to the Restatement of Contracts, the misrepresentation does not necessarily have to be “material.”[36] However, in practice, courts often demand fulfilment of this condition [37] or indirectly require “materiality” by means of the prerequisite of “justified reliance” or “inducement” (for both see further below).[38] This aspect is one of the main differences in comparison with damage claims for the tort of deceit, which the Restatement of Torts addresses, as in that respect a misrepresentation must be fraudulent as well as material.[39] Materiality is a difficult term to define. Thus, in practice, the possible interpretations vary.[40] Generally, a matter is material according to section 538 of the Restatement of Torts if “a reasonable man would attach importance to its existence or nonexistence in determining his choice of action in the transaction in question.”[41]

Another prerequisite is “inducement.”[42] Based on the lie, the deceived party needs to have been induced to assent to the contract.[43] Nevertheless, it is not necessary that the deception was the main or only reason to enter into the contract. However, the lie must have been “substantial” for the decisionmaking process.[44] In this respect, in the course of the rescission, the claim is indirectly based upon the requirement of materiality.[45] With regard to the tort of deceit, “causation” is also discussed intensively.[46]

Moreover, the reliance must be justified.[47] In essence, the deceived party must have relied on the false statement and the established reliance must have been legitimate.[48] Circumstances under which a justified reliance is rejected are inter alia, misrepresentations “of only peripheral importance to the transaction” or false statements that are not expected to be taken seriously.[49] In this respect, the customary practice of market participants is also taken into account.[50] Hence, the prerequisite of “justified reliance” imposes a certain degree of individual responsibility on the deceived party.[51] Irrational behavior can serve as an indicator to determine that the deceived party did not actually rely on the lie.[52] If it can, however, be proven that the deceived party did place trust in the statement made, neither stupidity nor irrationality is harmful.[53] Only “a failure to act in good faith and in accordance with reasonable standards of fair dealing”[54] can cause a different assessment. The element of self-responsibility gains even more importance when looking at the tort of deceit.[55]

If all requirements are fulfilled, the deceived party can challenge the contract or enforce damage claims.[56] In the course of damage claims based on the tort of deceit, the deceived party also has to prove a pecuniary loss.[57] This requirement is not explicitly stated as a prerequisite for rescission.[58] Yet, in practice, some courts seem to view pecuniary loss as a prerequisite.[59]

Section 549 of the Restatement of Torts defines what is to be regarded as “pecuniary loss” in the context of the tort of deceit. There are several forms of pecuniary losses. One relevant loss is described by the out-of-pocket rule. According to this rule, it is only important whether the misrepresentation causes a situation in which the value of the purchased object is lower than its purchase price.[60] This also includes indirect or consequential damages.[61] Yet, both cases are not relevant for deceptions outside the scope of the subject matter of the contracts, which are mainly analyzed in this Article. Nevertheless, there is the option to replace the advantage the deceived party would have gained from entering into the contract. This approach refers to the so-called “benefit of the bargain.”[62] Yet, this possibility is restrained by the burden of proof. According to the latter, the deceived person has to prove his or her loss “in accordance with the usual rules of certainty in damages.”[63] The question arises, whether damages based on lies about aspects other than the actual subject matter of the contract are included.

3. Case Law

Though the relevant case law on misrepresentations will not be illustrated in great detail here, it is clear that in most—though not in all—cases concerning deceptions about the subject matter of the contract, a rescission is possible. If, however, a seller makes statements about the quality of his or her product with the help of general adjectives, like it is “a good car,” usually, an assertion of opinion is assumed,[64] and the rescission of the contract is therefore granted only in exceptional circumstances. The same rationale applies to statements on the value of an object (for example, “the goods are worth $10,000”[65]).[66] Remarks on the price, such as “this is a good price” and so forth, are generally also regarded as opinions.[67] More specific deceptions that concern the nature of the price (for example, deceptions regarding the cost or stock market price), may, however, support a claim for rescission.[68] Neither U.S. literature nor traceable case law addresses how statements such as, “this is a friendship price,” shall be treated. Yet, the discussion on misrepresentations of value and price indicates that such a bluff would probably not justify a rescission.[69] As for now, there also seems to be no case law on lies about the reservation price.[70]

An “assertion as to matters of law” can take two forms: (1) a statement of fact or (2) a statement of opinion.[71] If, for instance, the deception concerns whether a particular law is in force or not, the deception regards a fact. This situation is then treated equally as other misrepresentations of facts [72] and may therefore grant the deceived party the remedy of rescission.[73] Likewise, this rule also covers lies about a statutory maximum price.[74] Many deceptions about legal matters do, however, concern lies about probable outcomes of court proceedings. Such statements are classified as statements of opinion [75] and only in very exceptional cases entitle a rescission.[76] In practice, it is also relevant whether the lie concerns national or foreign law.[77]

The deception of the negotiation partner with regard to another better offer is not discussed in the Restatement of Contracts’ explanations. But occasionally case law on the topic can be found.[78] For instance, in Kabatchnick v. Hanover-Elm Building Corp. (a tort of deceit case) the court ruled in favor of a plaintiff who was deceived by a false claim of another offer.[79] Another case similarly granted tort damages for false statements of another offer (combined with time pressure).[80] However, neither of these judgments addressed the extent to which damages can or should be taken into account.[81] The judgments rather stated that damages have occurred and that it is not harmful that the deceived party cannot prove an exact amount of damages.[82]

On many other practically relevant misrepresentations in contract negotiations, such as lies about the availability of a product,[83] deadlines,[84] reservation prices, and internal company policies, almost none or only very few cases could be found. Of the few cases, some are based on special provisions not relevant to the general concept of “misrepresentation.”[85]

B. Germany

1. Applicable Law

In Germany, there is also more than one legal concept that deals with the legal consequences of lies in contract negotiations. The main rule is, however, section 123 paragraph 1, first alternative of the German Civil Code (“BGB”),[86] which addresses the right to rescind a contract due to fraudulent misrepresentation. Besides this, there may be entitlement to damages according to culpa in contrahendo,[87] that means negligence in contracting (“Verschulden bei Vertragsschluss”). If a case of criminal fraud (section 263 of the German Penal Code (“StGB”)) is brought, section 823 of the BGB (dealing with the tortious liability in civil law) is also applicable. In this way, in conjunction with the aforementioned criminal law rule, tortious claims can be brought forward. Moreover, lies about the subject matter of the contract are addressed by warranty law.[88] The following part will focus on section 123 of the BGB as the main rule and in this respect only addresses the very basic structure.

2. Section 123 of the BGB (German Civil Code)

A rescission according to section 123 of the BGB requires a willful deception.[89] The relevant term used in law, “fraudulent” (“arglistig”), has now for a long time been equated with the term “willful” or “intentional.”[90] Moreover, a causal link has to be proven, namely in two respects.[91] First, the act of deceit must induce the occurrence or maintenance of an error for the other party. Secondly, the error must have led the deceived party to have made a declaration of intent with the corresponding content.[92] In this respect, it is irrelevant whether the deceived party would not have agreed to the contract without the deception (“dolus causam dans”) or whether he or she would have just desired a contract with different terms (“dolus incidens”).[93] Viewing the deception, it is also sufficient if the deceived party would otherwise not have agreed to the contract at that exact time (but, for example, at a later point).[94]

Section 123 of the BGB establishes no further requirements for the misrepresentation such as a “reprehensible attitude”[95] (“verwerfliche Gesinnung”), intention to harm the deceived party, actual financial loss for the deceived party,[96] intention of the deceiving party to enrich him– or herself or a third party,[97] materiality, or justified reliance. The fact that the negotiating partner could have been more attentive and would consequently have been able to recognize the deception beforehand does not exclude a rescission of the contract.[98]

Section 123 of the BGB only applies in cases of deceptions about facts (objectively comprehensible statements).[99] Expressions of opinion and value judgments are not included in the scope of the rule.[100] In this regard it must, however, be assessed whether the expression of “opinion” does actually contain a statement of fact at its core (“Tatsachenkern”).[101] If this occurs, the fact at the core of the opinion can give rise to a rescission claim. Accordingly, mere sales talk or puffery (“marktschreierische Anpreisungen”) does not justify a rescission based on the conduct of fraudulent deception [102] if the statement concerned has no “factual content”[103] and thus comprises no deception of fact.

Concerning fraudulent deception, unlawfulness is not an explicit prerequisite.[104] The legislative materials evince that the legislature has deliberately decided against requiring unlawfulness.[105] This is due to the fact that the legislature assumed a fraudulent deception to be unlawful in all circumstances.[106] Nonetheless, there is, in particular, one case group in which the aspect of unlawfulness is discussed: lies in response to unlawful, or, more precisely, discriminatory questions. For example, questions asked by an employer regarding whether a job applicant is pregnant [107] or questions about the applicant’s ethnic origin [108] are inadmissible (discriminatory). For this reason, these questions may also be answered untruthfully by the applicant without legal consequences.[109] Some authors hold the view that “unlawfulness” should generally be recognized as a requirement of the law.[110]

3. Case Law

The legal situation in Germany seems to be very clear with respect to section 123 of the BGB; it entitles a deceived party to a far-reaching right of rescission. Regarding lies about the subject matter of a contract, this is also——almost without exception—reflected in the corresponding case law.[111] For deceptions outside the subject matter of a contract, however, there is practically no relevant case law within the area of B2B transactions. For example, only one case addressing a misrepresentation about a better alternative offer could be found. This single judgement by a district court (“Amtsgericht”), however, dates back to 1933 and has not even been published fully by the district court in Berlin.[112] In this case, the right of rescission was confirmed.[113] Nonetheless, not enough details of the circumstances of the case are publicly accessible to draw clear conclusions. There are no other known cases on this aspect, despite the prominence of this deception tactic.[114] Nonetheless, there are certain similarities to court rulings in the field of labor law, in which, for example, an applicant states a false (in this case, too high) salary previously paid. However, in this respect the legal landscape does not provide any clear conclusions either.[115]

Oftentimes, lies about the price can justify a rescission even in a B2B context. Examples include misrepresentations about purchase prices and profit margins,[116] as well as the incorrect indication of a “friend’s price” or “mate’s rate,” “reasonable price,” “especially favorable price,” “special price,” or falsely stating a “non-binding recommended retail price.”[117] In principle, it is also possible to claim a rescission of the contract if a deception about the legal situation is provable.[118] Alas, there is (almost) no available case law on this subject.[119] Moreover, the existing cases show that the demarcation of lies about the legal situation and of bluffs about legal views may prove very difficult.[120]

In Germany, there are almost no cases dealing with deceptions outside the actual subject matter of the contract and the contractual partner (for example, on misrepresentations of personal preferences, deadlines,[121] internal company policies, or the availability of a product).[122]

C. Overview of the Legal Differences Between the United States and Germany

German law provides an abstract, general rule, while U.S. law leaves significant leeway for interpretation.[123] Even the Restatements of Contracts and Torts, with their primary purpose of simplifying the law, indicate the actual complexity of the legal concept of “misrepresentation” in the United States.[124] Apart from the prerequisites of an intentional misrepresentation and causality, other U.S. legal requirements are unknown to German law. This implies that German law is less flexible and does not allow for any kind of lawful lies.

Both jurisdictions are similar with regard to having very few relevant cases about deceptions outside the subject matter of a contract. This may be due to the fact that, in the majority of cases, such lies are not uncovered. However, even in cases where the deceived party exposes such lies, there are often major difficulties in presenting sufficiently substantiated evidence for an effective claim. Due to the cost of a lawsuit, lodging a claim is oftentimes not economically feasible. Moreover, for B2B relationships, there is a general tendency to resolve problems in the course of extrajudicial arrangements. Furthermore, in the United States, not only the faint chances of winning such a case but also the party’s Rechtsgefühl will probably prevent the deceived party from claiming rescission of the contract or enforcing compensation of damages. However, the faint chances of winning do not explain the low number of such cases in Germany, where the law provides (at least according to its wording) a remedy for all kinds of lies. Still, in Germany, it also runs contrary to the Rechtsgefühl to challenge a contract in many of these situations, which is probably why many people refrain from pursuing this path.

The relevant case law in both countries reveals that deceptions concerning the subject matter of a contract itself are generally covered, even though, unlike in Germany, this is not always the case in the United States. At the same time, the jurisprudence, or rather the lack of jurisprudence, in the United States shows that most deceptions outside the subject matter of the negotiation normally do not entitle the deceived party to rescind the contract. The two aforementioned cases, involving bluffing about a better offer, seem to be the exception rather than the rule. The previously illustrated prerequisites also offer the leeway to disallow any rescission for the corresponding lies. With regard to German law, the lack of jurisprudence does not necessarily indicate that the rescission is not granted in cases of deceptions outside the scope of the subject matter of the contract. Viewing only the law as it stands, it could be assumed that in most of these cases there is a possibility to rescind the contract.

D. Summary

There are considerable differences between the law in Germany and the law in the United States. Yet, it can be noted that both legal systems are equal in that their law by no means reflects widely held moral intuitions. In the United States, both a majority of students and lawyers consider not only deceptions about the subject matter of the contract and the legal situation to be immoral, but also assess lies about better offers, the availability of a product, and internal company policies to be morally unacceptable. However, American law, in general, does not allow the deceived party to rescind the contract in all of these circumstances. At least U.S. law, mainly due to its high degree of flexibility, more or less reflects the prevalent Rechtsgefühl. This corresponds with the expectation postulated above that the general Rechtsgefühl affects or should affect the abstract law (not the individual case) in the long-term. On the contrary, in Germany, section 123 of the BGB neither reflects people’s moral intuition nor their Rechtsgefühl because it exceeds both of these concepts. In fact, it rather mirrors the ideas of traditional moral philosophers who generally condemn lies to a great extent.

The following graph depicts the relationship between (1) the ideas of traditional moral philosophers, (2) people’s actual moral intuition, (3) people’s Rechtsgefühl (sense of how the law should be), and (4) the law in the United States and Germany:

III. Reasons for the Legal Differences between the United States and Germany

Since in both countries’ moral intuition and Rechtsgefühl were assessed very similarly by the respondents of the survey, the legal differences can hardly be explained by focusing on these two specific aspects. However, different general values in the United States and Germany certainly play a role in explaining the legal divergences in both countries. U.S. law, for instance, puts much more emphasis on the individual’s personal responsibility and freedom of action than does German law.[125] German law, in turn, focuses more on preserving the deceived party’s autonomy and freedom of decision.[126] Moreover, legal differences regarding related concepts, for instance the law of warranties, certainly influence the concept of misrepresentation and therefore might have contributed to the occurring divergences. Yet, this alone does not sufficiently explain why German law sets out legal consequences for virtually all lies even though the Rechtsgefühl—even that of German judges—deems a more differentiated provision appropriate.

In this respect, legal history may provide further insights. German law has its roots in Roman law.[127] However, in contrast to section 123 of the BGB, Roman law was open to differentiations regarding deliberate deceptions of an individual in the course of a negotiation.[128] Roman law distinguished between dolus bonus and dolus malus [129] and did not include certain lies that fell within the scope of sollertia [130]—a term that stands for “skill, shrewdness, quickness of mind, ingenuity, dexterity, adroitness, expertness.”[131] Overall, the concept was not clearly defined. Hence, casuistic case law was very important. Even if the concept of the dolus suggests a relatively broad scope, its central area of application was not the protection of misleading information regarding certain characteristics of the sales object. It is even questionable whether such cases were covered at all.[132] The analysis of various sources, rather, points to a wide scope for deceptive actions in contract negotiations. Usual commercial practices were probably the point of reference for distinguishing between lawful and unlawful lies.[133] Moreover, as for the Romans, the act of deception was, at least to a certain extent, part of everyday business practice.[134] With regard to pricing, Paulus is often quoted as saying that “[n]aturally it is allowed to buy what is worth more for less, to sell what is worth less for more, and thus to over-benefit each other. This also applies to contracts of rent and services.”[135] In the following, it will be examined when and how German law has lost the differentiated view, which was immanent in Roman law.[136]

Inspired by rationalism, the seventeenth and eighteenth centuries brought forth the quest for basic values and principles as opposed to a case by case decision practice.[137] Yet, this so-called usus modernus left the core of the law, in the form of the Ius Commune, relatively unaffected.[138] With regard to the rescission of the contract by reason of deception, the question was less about which misrepresentations should be affected but rather about determining legal consequences for this conduct.[139] The ideas promoted by the movements of the Enlightenment and natural law, in form of the so-called “law of reason,” particularly flourished in the eighteenth century.[140] In parts of what is today Germany, the General State Laws of Prussia (Allgemeines Landrecht, or ALR) of 1794, and the Austrian General Civil Code (Allgemeines Bürgerliches Gesetzbuch, or ABGB) of 1811 (until 1866 Austria was part of the German community of states), as well as the French Code Civil of 1804 (which was applied in Germany in the Rhineland and in Baden until 1900), were significantly influenced by the principles of natural law.[141] Linked to the establishment of these laws, a “charging of law” with ethical considerations occurred.[142] In this sense, the independence of social ethics from moral theology is decisive.[143]

Under the influence of the teachings of Savigny and his successors, the German Historical School of Law of the nineteenth century formally distanced itself from the Enlightenment and natural law movements.[144] The German Historical School of Law dedicated itself to the systematization and modernization of Roman law according to the “Volksgeist” (verbatim, “spirit of the people”).[145] This systematization was valued so highly that sometimes simplifications and a neglect of the search for interest-oriented results were the outcome.[146] Moreover, Savigny’s writings were in the tradition of Kant’s.[147] In turn, Kant, in a particularly radical way, rejected a right to lie, even in circumstances of emergency.[148] Savigny himself, however, still mentions the distinction between dolus malus and dolus bonus.[149] Nonetheless, at the same time, one can also read the high value that Savigny attaches to truth: “[t]he necessary condition of all community, however, is truthfulness and the trust that it establishes.”[150] His remarks demonstrate that he attributed the element of an ethical perspective to the dolus malus.[151] At the same time, the idea of the “independent existence”[152] of law, established by the German Historical School of Law, “which should not force but enable autonomous morality,”[153] must be taken into consideration. The subsequent generation of lawyers, the so-called Pandectists,[154] based their works on legal positivism, assuming that regulations could be derived solely “from system, concepts and doctrines” and without the external influence of religious, social, or scientific considerations.[155] A “clearly contoured law” without much scope for interpretation was therefore rather aligned with the tendencies of the Pandectists.[156]

In the context of the establishment of the German Civil Code (“BGB”), the legislature did not discuss misrepresentations outside the subject matter of the contract, which are explored in this Article.[157] However, the initially introduced BGB left some leeway for interpretation. Above all, the pre-contractual phase was less regulated. Only over time, did this area increasingly become the subject of different rules. Moreover, even though the Roman dichotomy between dolus malus and dolus bonus is not explicitly discussed in the documentation of the legislative process of creating the BGB, a distinction between lawful and unlawful lies still seemed to be included [158] in the wording of the provision: “arglistige Täuschung,” which literally translates to “malicious deception.”[159] “Arg” was originally an old swearword [160] that the Brothers Grimm even used as a synonym for the Latin term malus.[161] While in this context “arglistig” has a negative connotation, “listig” (“cunning”) is not necessarily negatively connoted and likewise derives its meaning from from “klug” or “schlau” (“clever”).[162] The documentation of the legislative process leading to section 123 of the BGB also states that “[i]n general, any malicious offense against the principles of good faith (“Treu und Glaube”) to the detriment of another presents itself as fraud.”[163] Hence, in the early years of the German Civil Code, the required malicious deception (“arglistige Täuschung”) was often interpreted as malicious, immoral deception.[164] Yet, soon, in jurisprudence and literature, the opinion that malice was equated with intent prevailed.[165] The focus was rather on promoting the idea that the deceiving parties’ actual attitude is not relevant. The provision was not supposed to have a sanctioning character. Moralizing deliberations should not be significant for the interpretation of the rule.[166] The “free self-determination in the field of legal transactions,”[167] as already the motives state, came to the fore [168] and left less room for distinguishing between lawful and unlawful lies.

In theory, there is still the recognition of trade customs, which is recognized in a general manner within the German Civil Code [169] and is in particular also applicable with regard to commercial transactions.[170] One of the leading representatives of an intensified liability for negligence in contracting, Walter Erman, admitted, still back in 1934, that commercial customs create a leeway, according to which certain untrue expressions are to be tolerated in the negotiations.[171] According to the present status of German law, in contrast to the original ideas of the German Civil Code legislature, common trade customs became almost insignificant.[172] Hence, nowadays, trade customs do not represent a practical possibility to exclude certain intentional deceptions from the scope of section 123 of the BGB. The abolition of the possibility to differentiate by means of the “fraudulent intent” or “trade customs” was the main reason for the comprehensive scope of section 123 of the BGB. The rediscovery of the unwritten element of “unlawfulness” in this way constitutes a (small) counter-movement, since it permits the exclusion of “lawful” misrepresentations from the comprehensive scope of application. Yet, up until now this possibility has only been exercised for undoubtedly unlawful (in particular, discriminatory) questions (for example, asking job applicants about an existing pregnancy). There are no further exceptions established in judgments.[173]

In summary, it can be stated that the German legal system never conducted a separate in-depth discussion on deceptions outside the subject matter of the contract. Originally, these kinds of deceptions were presumably not included by section 123 of the BGB either, but the progressive legislative coverage of cases concerning pre-contractual actions de facto led to a comprehensive coverage. Eliminating the possibility of evaluation within the provision, up to this day had the effect that exceptions can be granted only to a nearly insignificant extent. Compared to the United States, this has caused a divergence of the two legal systems.

IV. Possible Future Developments

The theoretically complete unlawfulness of deceptions in contract negotiations in Germany neither corresponds with people’s prevalent Rechtsgefühl nor with their moral intuition. This can serve as a strong indication that one should reconsider a different interpretation of German law or even implement adaptions. In the spirit of bringing German law back on the path “to its roots,” specifically back to its Roman foundations, German law should reintroduce a differentiation between lawful and unlawful lies. Naturally, the question arises where exactly the German legal order should draw a distinct line between lawful and unlawful lies. This specific question will be discussed in a separate paper, solely dedicated to examining this topic in depth.

However, this Article promotes the idea, that, next to other arguments, people’s Rechtsgefühl should be taken into account regarding this question. In contrast, people’s moral intuition is considered to be less crucial for finding a legal solution. These claims are limited to bluffs and lies in business-to-business contract negotiations. The discussion on the more general relationship between moral intuition, the Rechtsgefühl, and the legal situation deserves a more in-depth analysis.

Besides economic aspects also have to be considered with regard to distinguishing lawful from unlawful lies.[174] In this respect, it will be important to ensure that the parties involved in transactions will not lose their faith in the market and its regulating forces. In addition, the proposed rule should be formulated as unambiguously as possible and align with the existing laws, especially with regard to the rules on disclosure. Even though this paper does not address misrepresentations based on omissions, the presented findings certainly have an influence on the following aspect: if a party is legally allowed to bluff about a certain aspect in a negotiation, it will also be allowed to not disclose any information on that issue. In return, if the law requires disclosure, the given information has to be correct.

However, German law should not just copy respective concepts from U.S. law because, even though U.S. law reflects people’s Rechtsgefühl more or less, it leaves a lot of room for interpretation due to the broad concepts like “materiality,” which complicate predicting the likely outcome of certain cases. Hence, it could be considered trying to achieve the same result by means of both clearer and more precise rules. In that way, people who wish to act lawfully would have a better sense for differentiating lawful from unlawful lies.

[*] *.. Junior Professor (Associate Professor) of Civil Law and Company Law at the University of Siegen (Germany). I would like to thank Peter Krebs, Richard Epstein, Constantin Willems, Robert Miller, Nick Cowen, Charles Delmotte and all the participants of the Symposium on Convergence and Divergence in Private Law (November 3–4, 2018, New York University) for their insightful comments. I would also like to thank Melissa Dowse (University of Siegen) for her help translating this Article into English.

[1]. All four terms will be used synonymously in this Article. Accordingly, a lie (or a bluff, deception, or misrepresentation) is given when an intentionally false statement is made. More precisely, this encompasses all scenarios where a statement does not correspond with the actual situation and the deceiver deliberately intends to deceive the opposite party. For a corresponding definition, see Sissela Bok, Lying 13–14 (2d ed. 1999).

[2]. Saul Levmore, A Theory of Deception and Then of Common Law Categories, 85 Tex. L. Rev. 1359 passim (2007) (describing deceptions in very different areas and their common denominations).

[3]. See, e.g., Stephen R. Guth, The Contract Negotiation Handbook, at iii (2008); James H. Michelman, Deception in Commercial Negotiation, 2 J. Bus. Ethics 255, 255 (1983); G. Richard Shell, When Is It Legal to Lie in Negotiations?, 32 Sloan Mgmt. Rev. 93, 93 (1991).

[4]. This Article does not address lies based on silence and omissions of information.

[5]. The English terms “sense of justice” and “sense of unlawfulness” are not exact translations of the German term, which is why I will use “Rechtsgefühl” throughout this Article. German literature distinguishes different forms of the “Rechtsgefühl.” E.g., Erwin Riezler, Das Rechtsgefühl: Rechtspsychologische Betrachtungen 78 (1946) (distinguishing between: (1) the sense of what is lawful, (2) the sense of how the law should be, and (3) the sense of respect towards the legal order). This Article refers to the second meaning: the sense of how the law should be. See Franz-Xaver Kaufmann, Rechtsgefühl, Verrechtlichung und Wandel des Rechts, in Lampe 185, 185–99, 197 n.4 (1985).

[6]. For further explanation on this topic, see infra Section I.A.

[7]. See infra Part III.

[8]. The United States, Germany, China, Russia, England, Ireland, Austria, Spain, Argentina, Italy, Poland, Ukraine and Turkey participated in the survey. See Siegen Study on Bluffs in B2B Contract Negotiations, Univ. of Siegen [hereinafter Siegen Study], https://www.wiwi.uni-siegen.de/contract
governance/survey/?lang=de (last accessed June 18, 2019).

[9]. See id. (surveying 907 students, 78 professional negotiators, 31 lawyers, and 26 judges).

[10]. Id. (surveying 104 students and 21 lawyers).

[11]. The terms “deception” or “lie” are not used at all in the questionnaire. Id.

[12]. Id.

[13]. The term “causal” refers to the fact that the lie actually induced the deceived party to enter into the contract.

[14]. Siegen Study, supra note 8. For the sake of simplification, the study only inquired the sense of justice with regard to rescission and not to damages. Id.

[15]. For a discussion of the influence of the identification of participants on moral assessments, see Shirit Kronzon & John Darley, Is This Tactic Ethical? Biased Judgments of Ethics in Negotiation, 21 Basic & Applied Soc. Psychol. 49, 49–58 (1999).

[16]. See Siegen Study, supra note 8. The answers of German students to an additional questionnaire reveal that they generally responded by taking into consideration their personal moral intuition, at least in some capacity.

[17]. Aristotle, Nicomachean Ethics bk. IV, at 105 (Martin Ostwald trans., Macmillan Publ’g Co. 1962) (c. 384 B.C.E.); Saint Augustine, Against Lying, in 16 Treatises on Various Subjects 125 et seq. (Roy J. Deferrari ed., Harold B. Jaffee et al. trans., 1952) (c. 420); Thomas Aquinas, 41 Summa Theologiae: Virtues of Justice in the Human Community 157–59 (T. C. O’Brien trans., Hartford Seminary Found. 1971) (1274); Immanuel Kant, On a Supposed Right to Tell Lies from Benevolent Motives (1797), reprinted in Kant’s Critique of Practical Reason and Other Works on the Theory of Ethics 361–65 (Thomas Kingsmill Abbott trans., 6th ed. 1909) [hereinafter Kant, Supposed Right]; Immanuel Kant, The Metaphysics of Morals 429 (Mary Gregor ed. & trans.,1996) (1797) [hereinafter Kant, Metaphysics] (briefly discussing the immorality of even well-intentioned lies). For a general discussion, see Bok, supra note 1, at 3346; Larry Alexander & Emily Sherwin, Deception in Morality and Law, 22 Law & Phil. 393, 395–97 (2003). Other influential thinkers are less strict and consider at least some lies to be justifiable. See, e.g., 1 Jeremy Bentham, The Works of Jeremy Bentham 105 (John Bowring ed., Russell & Russell, Inc. 1962) (1838–1843) (“Falsehood, take it by itself, consider it as not being accompanied by any other material circumstances, nor therefore productive of any material effects, can never, upon the principle of utility, constitute any offence at all.”); 2 Hugo Grotius, On the Rights of War and Peace 892 (Richard Tuck ed., Liberty Fund, Inc. 2005) (15831645) (“As also he that procures a Contract or Promise by Force, Fraud, or unjust Terror, is bound to release the Person who made the Contract or Promise, from any Obligation of Performance . . . .”); John Stuart Mill, Utilitarianism 33–34 (Longmans, Green & Co. 1901) (1863) (permitting lying in only a few narrow circumstances).

[18]. See, e.g., Seana Valentine Shiffrin, Speech Matters: On Lying, Morality, and the Law 3 (2014).

[19]. Participants who state that lying about the subject matter of a contract was morally acceptable included 16.5% of German students, 21.8% of U.S. students, 22% of German professional negotiators, 13% of German lawyers, 12% of U.S. lawyers, and 4% of German judges. Siegen Study, supra note 8. It should be noted that the survey deals with an exaggeration and not with a completely invented fact.

[20]. Id. With regard to their responses to harmful lies, differences between the U.S. and German test groups can be noted.

[21]. On excuses and justifications of lies and white lies, see, for example, Bok, supra note 1, at 57–106; Richard Epstein, Smart Consequentialism: Kantian Moral Theory and the (Qualified) Defense of Capitalism, in Are Markets Moral? 32, 43–49 (Arthur M. Melzer & Steven J. Kautz eds., 2018).

[22]. The American Bar Association’s Standards and Rules of Procedure for Approval of Law Schools requires that a class on professional responsibility be taught to all students for a law school to receive accreditation. Standards and Rules of Procedure for Approval of Law Schools r. 303(a)(1) (Am. Bar Ass’n 2018). In Germany, courses on business ethics are not part of the standard curriculum of law and business programs. See, e.g., Juristenausbildungsgesetz [Legal Education Act] Nordrhein-Westfalen [JAG NRW], Apr. 11, 2019; Ausbildungs– und Prüfungsordnung für Juristen [JAPO] [Training and Examination Regulation for Lawyers], Bavaria, March 1, 2018.

[23]. The Model Rules of Professional Conduct serve as the models for the ethics rules in most U.S. jurisdictions. Model Rules of Prof’l Conduct pmbl. (Am. Bar Ass’n 1983).

[24]. For example, if the lie was morally acceptable there would be no legal consequences and vice versa.

[25]. On the effects of the sense of legal consequences on other legal questions, no general statements shall be made.

[26]. Only 31% of German lawyers and 26% of German judges view bluffs on internal company requirements as immoral. Siegen Study, supra note 8.

[27]. Among the Germans who participated in the study, only 9% of professional negotiators, 6% of lawyers, and 8% of judges favor entitling the deceived party to challenge the contract based on a bluff about an internal company policy. Siegen Study, supra note 8.

[28]. It should be noted that the answers of participants from other countries have not yet been analyzed fully. Nonetheless, the first results strongly point in this direction.

[29]. In the case of changes to the Rechtsgefühl, the adaptation of the law can take some time due to path dependencies.

[30]. Hence, rules on warranties, professional conduct, criminal law, the Uniform Commercial Code, as well as on the terms of consumer contracts and transactions in securities are not part of the analysis. The same is true for the concepts of “mistake” and “bargaining in good faith.” Possible contractual clauses (like non-reliance clauses) that deviate from the rules on misrepresentations are not taken into account either. Also, the parol evidence rule will not be discussed.

[31]. See Restatement (Second) of Contracts §§ 159–73 (Am. Law Inst. 1981).

[32]. Id. § 159. Situations in which a party lies in the course of the negotiation, but the true fact is mentioned in the concluded contract, are excluded here. In this case, it is usually not possible to challenge the contract. Shell, supra note 3, at 97.

[33]. Restatement (Second) of Contracts §§ 168–71 (Am. Law Inst. 1981).

[34]. Id. § 162.

[35]. In this context, usually the term “requirement of scienter” is applied. E.g., id. § 162; Robert W. Miller, Scienter in Deceit and Estoppel, 6 Ind. L.J. 152, 152 (1930).

[36]. Restatement (Second) of Contracts § 164(1) (Am. Law Inst. 1981).

[37]. See, e.g., Crooker v. White, 50 So. 227, 228 (Ala. 1909); Melvin v. Stevens, 458 P.2d 977, 980 (Ariz. Ct. App. 1969); Grane v. Grane, 473 N.E.2d 1366, 1373 (Ill. App. Ct. 1985); Stephanie R. Hoffer, Misrepresentation: The Restatement’s Second Mistake, 2014 U. Ill. L. Rev. 115, 130 & n.94 (2014).

[38]. Hoffer, supra note 37, at 130; see also Emily Sherwin, Nonmaterial Misrepresentation: Damages, Rescission, and the Possibility of Efficient Fraud, 36 Loy. L.A. L. Rev. 1017, 1020–21 (2003) (analyzing the complex relationship between materiality and justified reliance).

[39]. Restatement (Second) of Torts § 538(1) (Am. Law Inst. 1979); see also Sherwin, supra note 38, at 1021–25.

[40]. See Hoffer, supra note 37, at 130.

[41]. Restatement (Second) of Torts § 538(2)(a) (Am. Law Inst. 1979).

[42]. See Restatement (Second) of Contracts § 167 (Am. Law Inst. 1981).

[43]. Id. § 167.

[44]. Id. § 167 cmt. a.

[45]. See id. § 167 cmt. b (explaining that the “materiality of the misrepresentation is a particularly significant factor” in determining whether a misrepresentation induced assent).

[46]. Restatement (Second) of Torts §§ 546–48A (Am. Law Inst. 1979).

[47]. Restatement (Second) of Contracts § 164 (Am. Law Inst. 1981).

[48]. Id.

[49]. Id. § 164 cmt. d.

[50]. Fleming James, Jr. & Oscar S. Gray, Misrepresentation – Part II, 37 Md. L. Rev. 488, 488 (1978).

[51]. Alexander & Sherwin, supra note 17, at 411.

[52]. James & Gray, supra note 50, at 518.

[53]. Id.; see also Chamberlin v. Fuller, 9 A. 832, 836 (Vt. 1886) (“No rogue should enjoy his ill-gotten plunder for the simple reason that his victim is by chance a fool.”).

[54]. Restatement (Second) of Contracts § 172 (Am. Law Inst. 1981).

[55]. See Restatement (Second) of Torts §§ 541–541A (Am. Law Inst. 1979).

[56]. Id. § 525; Restatement (Second) of Contracts § 164 (Am. Law Inst. 1981).

[57]. Restatement (Second) of Torts § 549 (Am. Law Inst. 1979).

[58]. See Joseph M. Perillo, Calamari and Perillo on Contracts § 9.15 (6th ed. 2009).

[59]. Alexander & Sherwin, supra note 17, at 409; see, e.g., Leibowitz v. Great Am. Grp., Inc., 559 F.3d 644, 648–49 (7th Cir. 2009); Wootan & Saunders v. Diaz, No. 2017-0820, 2018 La. App. LEXIS 575, at *2021 (La. Ct. App. Mar. 28, 2018).

[60]. Restatement (Second) of Torts § 549 cmt. b (Am. Law Inst. 1979).

[61]. Id. § 549 cmt. d.

[62]. Id. § 549 cmt. l.

[63]. Id. § 549 cmt. h.

[64]. Restatement (Second) of Contracts § 168 cmt. b (Am. Law Inst. 1981).

[65]. Id. § 168 cmt. c, illus. 2.

[66]. Id. § 168 cmt. c.

[67]. This can be deduced from the Restatement of Contracts’ explanation that similar remarks, for example, that an automobile is a “good car,” should be regarded as opinions. See id. § 168 cmt. b.

[68]. Id. § 168 cmt. d, illus. 6; see also Voorhees v. Cragan, 112 N.E. 826, 828–29 (Ind. App. 1916); Stewart v. Salisbury Realty & Ins. Co., 74 S.E. 736, 737 (N.C. 1912).

[69]. On that discussion, see Restatement (Second) of Contracts § 168 cmts. b–c, illus. 2. (Am. Law Inst. 1981).

[70]. Shell, supra note 3, at 95 (rejecting the notion that lies about the reservation price are material and therefore grounds for rescission).

[71]. Restatement (Second) of Contracts § 170 cmts. a–b (Am. Law Inst. 1981).

[72]. Id. § 170 cmt. a.

[73]. Id. § 164.

[74]. Id. § 170 cmt. a, illus. 1.

[75]. Id. § 170 cmt. b.

[76]. Id. §§ 168–69.

[77]. Id. § 170 cmt. c (“The rule stated in this Section applies to statement of foreign as well as domestic law. Some courts have refused to recognize that statements of the law of a state or country where the recipient neither resides nor habitually does business are mere statements of opinion, even though they purport to cover only the legal consequences of facts known to both parties.”).

[78]. See Hayes v. Equine Equities, Inc., 480 N.W.2d 178, 182 (Neb. 1992) (stating that a seller’s false assertion that he had a “ready, willing and able purchaser” was not mere “sales talk or puffing” but rather “positive representations of fact upon which [a purchaser] could rely.”); see also Barron G. Collier, Inc. v. Braunig & Sons Baking Co., 202 N.W. 442, 443 (Minn. 1925) (describing a bluff about a “waiting list” of customers).

[79]. Kabatchnick v. Hanover-Elm Bldg. Corp., 103 N.E.2d 692, 692–95 (Mass. 1952).

[80]. Beavers v. Lamplighters Realty, Inc., 556 P.2d 1328, 1329, 1333 (Okla. Civ. App. 1976).

[81]. Id. at 1333; Kabatchnick, 103 N.E.2d at 692–95.

[82]. Kabatchnick, 103 N.E.2d at 695. Note, however, that this is a business-to-consumer case rather than a business-to-business case.

[83]. There are, however, cases that deal with the availability of mortgage financing in connection with the purchase and sale of real estate. See, e.g., Stephenson v. Capano Dev., Inc., 462 A.2d 1069, 1070 (Del. 1983).

[84]. There are, however, cases of false ultimatums concerning payments. See, e.g., Lawton v. Nyman, 327 F.3d 30, 34–35 (1st Cir. 2003) (dealing with a false deadline concerning a bank’s waiver); Koepplinger v. Seterus, Inc., No. 1:17cv995, 2018 U.S. Dist. LEXIS 144270, at *6–9 (M.D.N.C. Aug. 24, 2018); see also Ohlson v. Cadle Co., No. 04 Civ. 318 (DRH), 2008 U.S. Dist. LEXIS 77328, at *3–7 (E.D.N.Y. Sept. 30, 2008) (discussing a false deadline of payment).

[85]. See, e.g., Koepplinger, 2018 U.S. Dist. LEXIS 144270, at *6–9.

[86]. Translation at http://www.gesetze-im-internet.de/englisch_bgb/index.html.

[87]. BÜRGERLICHES GESETZBUCH [BGB] [CIVIL CODE], § 280, para. 1, § 241, para. 2, § 311, para. 2.

[88]. Moreover, demarcation questions with breach of public morals may arise. BÜRGERLICHES GESETZBUCH [BGB] [CIVIL CODE], § 138 (“Sittenwidrigkeit”). Besides this, the German Law Against Unfair Competition should be taken into account. Gesetz gegen den unlauteren Wettbewerb [UWG], §§ 5, 5a (discussing misleading commercial practices and omissions), translation at https://www.gesetze-im-internet.de/englisch_uwg/englisch_uwg.pdf. Furthermore, sections 267 and 187 of the German Criminal Code may play a role. Strafgesetzbuch [StGB] [Penal Code], § 267 (penalizing document forgery), translation at https://www.gesetze-im-internet.de/englisch_stgb/
englisch_stgb.pdf; Strafgesetzbuch [StGB] [Penal Code], § 187 (penalizing defamation).

[89]. Holger Wendtland, in Beck’scher Online Kommentar zum BGB [Beck Commentary on the Civil Code] § 123, para. 17 (50th ed. 2019).

[90]. See, e.g., Bundesgerichtshof [BGH] [Federal Court of Justice] June 13, 2007, Neue Juristische Wochenschrift [NJW] 3057 (3059), 2007; see also Christian Armbrüster, in 1 Münchener Kommentar zum Bürgerlichen Gesetzbuch [Munich Commentary on the Civil Code] § 123, para. 18 (8th ed. 2018).

[91]. See, e.g., Reinhard Bork, Allgemeiner Teil des Bürgerlichen Gesetzbuches para. 871 (4th ed. 2016); Andreas Feuerborn, in 1 Nomos Kommentar BGB: Allgemeiner Teil § 123, para. 41 (3d ed. 2016).

[92]. Armbrüster, supra note 90, § 123, para. 21; Feuerborn, supra note 91, § 123, paras. 41–43.

[93]. Bork, supra note 91, para. 871; Jürgen Ellenberger, in Palandt: Bürgerliches Gesetzbuch § 123, para. 24 (78th ed. 2019). Contra Martin Josef Schermaier, in 1 Historisch-kritischer Kommentar zum BGB §§ 116–24, para. 119 (Mathias Schmoeckel, et al. eds., 2018). See Andreas Wacke, Circumscribere, gerechter Preis und die Arten der List, 94 Zeitschrift der Savigny-Stiftung für Rechtgeschichte [ZRG] 184, 236–45 (1977) (discussing dolus causam dans and dolus incidens).

[94]. Feuerborn, supra note 91, § 123, para. 43; Ellenberger, supra note 93, § 123, para. 24.

[95]. Armbrüster, supra note 90, § 123, para. 18; Wendtland, supra note 89, § 123, para. 19.

[96]. Bundesgerichtshof [BGH] [Federal Court of Justice] June 21, 1974, Neue Juristische Wochenschrift [NJW] 1505 (1506); Oberlandesgericht Stuttgart [OLG] [Higher Regional Court] December 7, 2011, 3 U 135/11, BeckRS 01235, 2012 (discussing the issue in paragraphs 47–50); Armbrüster, supra note 90, § 123, para. 19.

[97]. Bork, supra note 91, para. 874.

[98]. OLG Düsseldorf, July 3, 2017, 4 U 146/14, BeckRS 130307, 2017 (discussing the issue in paragraph 163); Bork, supra note 91, para. 870; Armbrüster, supra note 90, § 123, para. 23.

[99]. Bundesgerichtshof [BGH] [Federal Court of Justice] September 19, 2006, Neue Juristische Wochenschrift [NJW] 357, (358) 2007; Armbrüster, supra note 90, § 123, para. 29; Wendtland, supra note 89, § 123, para. 8.

[100]. Bundesgerichtshof [BGH] [Federal Court of Justice] September 19, 2006, Neue Juristische Wochenschrift [NJW] 357, (358) 2007; Armbrüster, supra note 90, § 123, para. 29; Wendtland, supra note 89, § 123, para. 8.

[101]. OLG Stuttgart, December 7, 2011, 3 U 135/11, BeckRS 1235, 2012, paras. 4750; Ellenberger, supra note 93, § 123, para. 3.

[102]. Bundesgerichtshof [BGH] [Federal Court of Justice] September 19, 2006, Neue Juristische Wochenschrift [NJW] 357 (358), 2007; Ellenberger, supra note 93, § 123, para. 3; Wendtland, supra note 89, § 123, paras. 8–9.

[103]. Armbrüster, supra note 90, § 123, para. 29.

[104]. Id. § 123, para. 19.

[105]. Bericht der XII. Kom. v. 12. Juni 1896 [Report of the XII. Commission on the General Chapter of the German Civil Code] (1896), reprinted in 1 Die gesamten Materialien zum Bürgerlichen Gesetzbuch für das Deutsche Reich 965 (Benno Mugdan ed., 1899).

[106]. Id.

[107]. Armbrüster, supra note 90, § 123, para. 48 (describing pregnancy-related questions in job interviews); Feuerborn, supra note 91, § 123, para. 56.

[108]. Feuerborn, supra note 91, § 123, para. 54.

[109]. See Holger Fleischer, Informationsasymmetrie im Vertragsrecht 254–56 (2001).

[110]. Armbrüster, supra note 90, § 123, para. 19 (defending a teleological reduction of section 123 of the BGB). However, the methodological solution is still discussed.

[111]. At this point, many judgements could be mentioned. Below, a few concise examples are illustrated.

[112]. Amtsgericht Berlin [AG] [District Court], Mar. 22, 1933, 171 C 130/33 (published incompletely in Deutsche Justiz: Rechtspflege und Rechtspolitik; amtl. Blatt d. deutschen Rechtspflege, 82324 (1933)).

[113]. Id.

[114]. Paul Bockelmann, Kriminelle Gefährdung und strafrechtlicher Schutz des Kreditgewerbes 17 Zeitschrift für die gesamte Strafrechtswissenschaft [ZStW] 28, 33 (1967) (favoring some room to maneuver in this respect with regard to fraud); Gerhard Wagner, Lügen im Vertragsrecht, in Störung der Willensbildung bei Vertragsschluss 70, 70–71, 95–97 (Reinhard Zimmermann ed., 2007) (favoring a right to lie with regard to statements on reservation prices).

[115]. Bundesarbeitsgericht [BAG] [Federal Labor Court] May 19, 1983, Zeitschrift für Wirtschaftsrecht [ZIP] 210 (213), 1984 (rejecting the possibility to rescind the contract); see also Fleischer, supra note 109, at 256–60. Contra Arbeitsgericht Bad Oldesloe [ArbG] [Labor Court], July 15, 1969, 1 C 128/69, FHZivR 16 Nr. 126. It should be noted that the quoted case law cannot be transferred one-to-one to B2B situations, as a special relationship of trust is often assumed between employees and employers.

[116]. Bundesgerichtshof [BGH] [Federal Court of Justice] Jan. 22, 1964, Neue Juristische Wochenschrift [NJW] 811, (811) 1964 (describing the margin of earnings); Fleischer, supra note 109, at 261 (describing the right to challenge the contract in those cases); Benjamin Junglas, Bankenhaftung bei der Finanzierung von Schrottimmobilien, Neue Juristische Online Zeitschrift [NJOZ] 49, 62 (2013); Wendtland, supra note 89, § 123, para. 9.

[117]. AG Düsseldorf, Sep. 10, 2008, 32 C 6293/08, BeckRS 5960, 2009. See also Oberlandesgericht Hamm [OLG] [Higher Regional Court] June 12, 1992, Neue Juristische Wochenschrift Rechtsprechungsreport Zivilrecht [NJW-RR] 628 (62829), 1993; OLG Jena Dec. 6, 2005, 8 U 338/05, BeckRS 18097, 2011 (denying the causality in a case concerning the calculation of rent); OLG Frankfurt May 12, 1982, 17 U 273/81, DAR 1982, 294.

[118]. Kammergericht [KG], Neue Juristische Wochenschrift [NJW] 1219 (1220), 1971; Armbrüster, supra note 90, § 123, para. 30.

[119]. For two examples of cases rejecting a rescission, see Kammergericht [KG], Neue Juristische Wochenschrift [NJW] 1219 (1220), 1971; OLG Karlsruhe, Dec. 6, 2005, Zeitschrift für Wirtschaftsrecht [ZIP] 557, 558–59, 2006.

[120]. OLG Karlsruhe, Dec. 6, 2005, Zeitschrift für Wirtschaftsrecht [ZIP] 557, (55859) 2006.

[121]. Stephan Lorenz, Der Schutz vor dem unerwünschten Vertrag 483 n.1525 (1997) (assuming liability according to the rules of the c.i.c. (culpa in contrahendo) in a case dealing with faked time pressure and “unique opportunities”).

[122]. However, an online fashion store, Zalando, was sued in 2015 by the competition authorities based on a corresponding misrepresentation. Press release, Peter Brammen, Zentrale zur Bekämpfung unlauteren Wettbewerbs, Wettbewerbszentrale erhebt Klage gegen Zalando wegen irreführender Werbung (Nov. 11, 2015), https://www.wettbewerbszentrale.de/de/_pressemitteilungen/?id=268.

[123]. Perillo, supra note 58, § 9.24.

[124]. Id.

[125]. Especially regarding the right of rescission, personal responsibility is virtually irrelevant in Germany.

[126]. See, e.g., Armbrüster, supra note 90, § 123, para. 1. In this context, the German discussion about the theory of will, the theory of expression and the theory of trust (“Willens-, Erklärungs– und Vertrauenstheorie”) is to be taken into consideration. See Schermaier, supra note 93, §§ 116–24, paras. 4–6.

[127]. Initially the Roman legal rules in the form of the so-called “Ius Commune” (literally “common law,” but at that time referred to as Ius Commune throughout Europe), were applied in Italy, but later also in Germany. For more on this development, see 1 Helmut Coing, Europäisches Privatrecht 13–14 (1985); Franz Wieacker, Privatrechtsgeschichte der Neuzeit 114–24 (1967).

[128]. Antonio Carcaterra, Dolus Bonus / Dolus Malus passim (1970); Sebastian Martens, Durch Dritte verursachte Willensmängel 45–54 (2007) (describing Roman Law and its differentiation with respect to these forms of deception); Reinhard Zimmermann, The Law of Obligations: Roman Foundations of the Civilian Tradition 664–70 (1990); Ralph Backhaus, Ethik und Recht in Cicero: de officiis 3.12.50 ff, in Humaniora: Medizin—Recht—Geschichte (Festschrift für Adolf Laufs) 3, 3–13 (Bernd-Rüdiger Kern et al. eds., 2006); Wacke, supra note 93, at 221.

[129]. In the classical period, the term dolus was used instead of dolus malus. See Martens, supra note 128, at 49 n.191; see also Wacke, supra note 93, at 227.

[130]. Wacke, supra note 93, at 229 (pointing out that dolus bonus had a small scope of application). The Romans, to a large extent, tolerated deception during negotiations within the framework of sollertia. The distinction between dolus bonus and sollertia is not important for the purposes of the present argument. The decisive factor is that there was a certain amount of leeway; see also Zimmermann, supra note 128, 669–70 (describing dolus and sollertia).

[131]. Charlton T. Lewis & Charles Short, A Latin Dictionary 1721 (E.A. Andrews ed., 2d ed. 1891) (defining sollertia).

[132]. Martens, supra note 128, at 52; Backhaus, supra note 128, at 8 (listing examples).

[133]. Martens, supra note 128, at 52.

[134]. Id. at 53.

[135]. This quote is a translation of “naturaliter concessum est quod pluris sit minoris emere, quod minoris sit pluris vendere et ita invicem se circumscribere, ita in locationibus quoque et condictionibus iuris est.” Dig 19.2.22.3 (Alan Watson ed. & trans., 1985).

[136]. The Glossators then introduced the terminological distinction between dolus causam dans and dolus incidens, whereby unlawful deceptions are classified according to their severity. See Martens, supra note 128, at 87; Sprenger, Ueber dolus causam dans und incidens, 88 Archiv für die civilistische Praxis 359, 361 (1898). Yet, according to the vast majority of opinions, German law does not include this differentiating approach. See Bork, supra note 91, para. 871; Feuerborn, supra note 91, § 123, para. 43.

[137]. Coing, supra note 127, at 69–72; Wieacker, supra note 127, at 217–24 (explaining the practices in the seventeenth and eighteenth centuries).

[138]. Wieacker, supra note 127, at 243.

[139]. Martens, supra note 128, at 138–39.

[140]. Wieacker, supra note 127, at 249–80, 312 (describing the right to reason as part of natural law and the relationship between the Law of Reason and Enlightenment); see also James Gordley, The Philosophical Origins of Modern Contract Doctrine 85111 (1991).

[141]. Wieacker, supra note 127, at 265, 327–47 (“The profane Law of Reason of the modern age, after the Corpus Iuris the strongest potency of the newer legal development at all . . . .”). This is a translation of “[d]as profane Vernunftsrecht der Neuzeit, nach dem Corpus Iuris die stärkste Potenz der neueren Rechtsentwicklung überhaupt . . . .” Id.

[142]. A famous example of this is the French general clause in tort. The Code Napoleon; Or, The French Civil Code art. 138283, at 378 (A Barrister of the Inner Temple trans., 1827), http://files.libertyfund.org/files/2353/CivilCode_1566_Bk.pdf (providing a translation the French Civil Code of 1804).

[143]. Wieacker, supra note 127, at 266.

[144]. Id. at 352–53 (explaining Kant’s role in the “destruction of uncritical older natural law”).

[145]. 1 Friedrich Carl von Savigny, System des heutigen Römischen Rechts 14–18, 39–44 (1840). See also Wieacker, supra note 127, at 353–77 (“Hervorbringung des Volksgeistes . . . .”).

[146]. Martens, supra note 128, at 183.

[147]. Wieacker, supra note 127, at 360, 370, 385.

[148]. Compare Kant, Metaphysics, supra note 17, at 429 (discussing briefly the immorality of even well-intentioned lies), with Kant, Supposed Right, supra note 17, passim (providing a more concrete and sharp analysis).

[149]. 3 Friedrich Carl von Savigny, System des heutigen Römischen Rechts 118–19 (1840); 1 Bernhard Windscheid, Lehrbuch des Pandektenrechts 211 n.4 (5th ed. 1879) (referring to the meaning of the term fraud in the sense of dolus malus).

[150]. Savigny, supra note 149, at 115.

[151]. Id.

[152]. This is a translation of “selbständigen Daseyn.” Wieacker, supra note 127, at 397; see also Savigny, supra note 149, at 331–32.

[153]. This quote is a translation of “welches die autonome Sittlichkeit nicht erzwingen, sondern ermöglichen soll.” Wieacker, supra note 127, at 397.

[154]. See John. P. Dawson, The Oracles of the Law 450–59 (1968) (describing the Pandectists).

[155]. This quote is a translation of “aus System, Begriffen und Lehrsätzen.” Wieacker, supra note 127, at 431.

[156]. Martens, supra note 128, at 185 (focusing on the clearly contoured facts of the case).

[157]. Id. at 195–96 (demonstrating how the legislature particularly viewed technical matters).

[158]. See Michael Jüttner, Die Zurechnung der arglistigen Täuschung Dritter im rechtsgeschäftlichen Bereich unter besonderer Berücksichtigung des Problems der “gespaltenen” Arglist 8 (1998) (describing the impression of the wording).

[159]. Fleischer, supra note 109, at 333 (drawing the connection to dolus malus and therefore considering the term “not fitting”).

[160]. See Friedrich Kluge, Etymologisches Wörterbuch der deutschen Sprache 29 (24th ed. 2002) (defining the keyword “arg”).

[161]. 1 Jacob Grimm & Wilhelm Grimm, Deutsches Wörterbuch cols. 546–47 (1854).

[162]. See Kluge, supra note 160, at 443 (defining the keyword “List”); see also Grimm & Grimm, supra note 161, cols. 1070–73.

[163]. The quoted language is a translation of “Im Allgemeinen stellt sich jeder arglistige Verstoß gegen die Grundsätze von Treu und Glauben zum Nachtheil eines Anderen als Betrug dar.” The wording “by fraud” (“durch Betrug”) in the first draft had been changed to “fraudulent deception” in the second draft. Motive zum allgemeinen Theile des BGB, reprinted in 1 Die gesammten Materialien zum Bürgerlichen Gesetzbuch für das Deutsche Reich 467 (Benno Mugdan ed., 1899) (describing motives concerning section 103).

[164]. E.g., Reichsgericht [RG] [ Supreme Court of the German Reich] July 11, 1888, 23 Entscheidungen des Reichsgerichts Zivilsachen [RGZ] 130 (137), 2008 (requiring malicious intent, or “bösliche Absicht”); 1 Carl Crome, System des Deutschen Bürgerlichen Rechts 429 (1900) (describing malicious, or “böswillig,” deception); 1 Hugo Rehbein, Das Bürgerliche Gesetzbuch mit Erläuterungen für das Studium und die Praxis 148 (Verlag von Müller 1899) (using the term “böslicher Absicht”).

[165]. Fleischer, supra note 109, at 334.

[166]. Jüttner, supra note 158, at 22–29.

[167]. Motive zum allgemeinen Theile des BGB, supra note 163, at 465 (describing motives concerning section 103). The quoted language is a translation of “freie Selbstbestimmung auf rechtsgeschäftlichem Gebiete.”

[168]. Fleischer, supra note 109, at 244 (explaining the protective content of the provision).

[169]. See Bürgerliches Gesetzbuch [BGB] [Civil Code], § 242, translation at https://www.
gesetze-im-internet.de/englisch_bgb.

[170]. See Handelsgesetzbuch [HGB] [Commercial Code], § 346, translation at http://www.
gesetze-im-internet.de/englisch_hgb; see also id., § 310, para. 1, sentence 2.

[171]. Walter Erman, Beiträge zur Haftung für das Verhalten bei Vertragsverhandlungen, 139 Archiv für die civilistische Praxis [AcP] 273, 282–83 (1934).

[172]. See Nadia Al-Shamari, Die Verkehrssitte im § 242 BGB: Konzeption und Anwendung seit 1900, at 143 (2006) (describing a study of the BGH’s decisions in volumes 1 through 151).

[173]. See supra Section II.B.3.

[174]. Fleischer, supra note 109, at 263; Richard A. Posner, Economic Analysis of Law 119, 121–22 (9th ed. 2014) (rejecting a right to lie based on economic reasons); Anthony T. Kronman, Mistake, Disclosure, Information, and the Law of Contracts, 7 J. Legal Stud. 1, 15 n.42, 1819 n.49 (1978); see also Saul Levmore, Securities and Secrets: Insider Trading and the Law of Contracts, 68 Va. L. Rev. 117, 137–42 (1982) (explaining optimal dishonesty). See generally Ariel Porat & Omri Yadlin, A Welfarist Perspective on Lies, 91 Ind. L.J. 617 (2016) (supporting the lawfulness of some lies based on economic reasons).

The Long Convergence: “Smart Contracts” and the “Customization”of Commercial Law – Article by G. Marcus Cole

May 2019October 2019Southern California Law Review Admin

From Volume 92, Number 4 (May 2019)
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The Long Convergence:
“Smart Contracts” and
the “Customization” of Commercial Law

G. Marcus Cole [*]

Introduction

The rise of “smart contracts”—self-executing agreements built into computer code across distributed, decentralized blockchain networks—is the most recent step in the long convergence of contract law around the world. Smart contracts permit what has only been approximated before. Namely, they allow for the “customization” of contract law itself to fit the precise needs and circumstances of the parties to the transactions. This customization of contract law is only part of the long convergence. Indeed, for generations, all of commercial law has been moving towards satisfying the demand in the market for an efficient, effective law of commerce. This convergence is the natural result of an increasingly competitive market for the provision of the “product” we call commercial law. Like any other market, as it becomes more competitive, the products offered by suppliers—in this case, contract law—tend toward convergence.

Bespoke law is the natural end product of this competition and the resultant long convergence.

While smart contracts may be signaling that the convergence towards customized contract law is nearly complete, it is not a new or isolated development. In fact, it is at least several hundred years old and has been occurring across most of commercial law. Since the emergence of the lex mercatoria, or the Law Merchant, along the commercial crossroads and marketplaces of medieval Europe, merchants, their suppliers, and their customers have sought and shaped an efficient commercial law to meet the needs of trade.[1] Although the jus commune of the Middle Ages provided a common law throughout continental Europe, it was the merchants themselves who developed their own specialized—if not customized—law for commerce.[2]

The wealth generated by these merchants and their courts caused states to take notice. It should come as no surprise that the Law Lords of England embraced and adopted the Law Merchant at the dawn of the Industrial Revolution.[3] When England’s colonies formed states of their own, they too saw the need for a common or universal commercial law.[4] The disaggregated nineteenth-century states that would ultimately unite to form modern Germany, as well as the United States of America, confronted the same problem: how to conduct trade across multiple jurisdictions with their differing laws of commerce.[5] Although the German legal scientists were able to craft the German Commercial Code in 1861, their counterparts in the United States failed to develop a universal, all-encompassing commercial code until the codification movement resulted in the Uniform Commercial Code (the “UCC”) in the twentieth century.[6]

Although the conscious effort to bring about harmony in American commercial law can be traced back to the common law codification movement’s origins in the early nineteenth century, success was not achieved until the middle of the twentieth century.[7] As transportation and communications technology improved the ability of large businesses to engage in interstate commerce, a need arose to reduce the transaction costs associated with disparate legal regimes among the various states. The UCC arose as the triumphant product of coordinated efforts to harmonize business law, all while preserving the dignity of state sovereignty within the United States.[8]

The last four decades have seen considerable movement toward a universal law of contracts across disparate legal regimes. This movement spread beyond the borders of the United States, with the promulgation of the Vienna Convention on the International Sale of Goods (the “CISG”) in 1980.[9] The CISG accelerated the progress of a centuries-old arc of convergence of the various legal regimes governing commercial law over the last four-hundred years. The CISG was itself the spitting-image offspring of its forebearer, the UCC, originally submitted to the legislatures of the fifty United States back in 1951.[10]

Both the UCC and CISG were answers to a sticky problem: how can business be efficiently conducted across political borders without violating the sovereign integrity and law-provision authority of the states involved? The answer, embodied in the UCC and the CISG, was to humbly ask the relevant states to adopt uniform laws for transactions within each of their respective jurisdictions, so as to lower the costs associated with all transactions.[11]

This movement towards convergence has progeny. In 1999, the National People’s Congress of the People’s Republic of China adopted the New Contract Law, which becomes effective on January 1, 2000.[12] This law effectively adopted key structures and principles underlying the Vienna Convention.[13] This means that, while China is a decidedly civil-law regime, its contract law reflects the law of commerce developed over centuries in the common law of the United States, England, and before that, the Law Merchant and the ius commune of continental Europe.[14]

This Article will argue that, while much of the convergence in commercial law between civil-law systems and common law regimes has been purposive and deliberate, the overwhelming movement towards convergence has not been so intentional. Instead, it is the natural progression towards efficient “shortcuts” to solving the common problems for which commercial law has been developed. Convergence, in other words, characterizes the movement to provide a better, more efficient product in “the market for law.”

Furthermore, technological advancements have accelerated this convergence. The invention of the computer and word processing have made possible the proliferation of “boilerplate,” namely, standard form contracts and standard contract clauses.[15] Computer search engines have also made it possible, cheap, and even effortless for consumers and business people to carefully compare contract terms and wording between standard form contracts.[16] At no time in history has the marginal consumer of contract prices, terms, and language been so empowered to compare and insist upon the prices and non-price terms he or she desires. As “smart contracts” provide parties and their transactions with the ability for self-enforcing terms and conditions, the law of contract is becoming increasingly “privatized.” Parties to an agreement can now not only insist upon the terms they desire but they can also actually determine—within limits—how those terms will be enforced. Smart contracts permit parties to enforce their own terms themselves, without consulting governmental authorities, police, or courts.[17] In a very real sense, “choice of law” is now migrating towards “choice of algorithm.”

In the market for contract law, the traditional suppliers of law—namely, states—are increasingly encountering stiff competition from a variety of sources. Competitors are no longer limited to competing jurisdictions. They now include computer programmers and “artificially intelligent” computers. Although states enjoy a competitive advantage in the form of a monopoly over the legitimized use of physical violence, states and market participants are becoming increasingly aware that violence is not the only way to enforce contracts. Engineers, programmers, coders, miners, and other tech-savvy entrepreneurs are devising new, cheaper, nonviolent, and “stateless” ways of enforcing bargains.

These alternatives are presenting consumers of contract law with more choices than ever before. Just as competition in other competitive markets leads to a convergence of price and quality of the underlying commodities bought and sold, the competition to capture the consumers of efficient contract law has led to a convergence of its content. In short, in the same way that commodities around the world obey “the law of one price,” efficient contract law around the world is beginning to obey “the law of one law.”[18] Part I of this Article will describe “smart contracts” and blockchain technology. It will then explain the use of smart contracts in commercial transactions. This Part will then explain the three defining characteristics of smart contracts, namely, that they are “immutable,” “automated,” and “distributed.”[19] It is these three characteristics that allow smart contracts on the blockchain to substitute for the function of courts and armed officers to enforce contracts.

Part II describes the market for commercial law and, in particular, the market for an efficient law of contracts. It will illustrate the historical market forces that have led suppliers of law—governments, the Catholic Church, medieval synagogues, as well as more modern private associations—to service this market with law as demanded by market participants themselves. These competitive forces, in turn, have led to the convergence we have witnessed and are currently witnessing. Part II will also trace the path of convergence in commercial law from the Law Merchant and Ecclesiastical Law through the common law and into the civil law systems of today. It will emphasize both the historical competition between law-providers, like the state and the Catholic Church, as well as modern jurisdictional competition between states in the market for law-provision. It will also point out how the purposive coordination between institutions has acted as “concrete blocks” dropped into a “sea” with the expectation that “coral reefs” of law will form around them.[20] In this way the codification movement, while a coordinated product of central planning, has resulted in further “spontaneously-ordered” law.[21]

Part III of this Article will assert that the convergence we are witnessing in contract law is the natural result of the increasing competitiveness in the market for the provision of contract law. It visits one of the fundamental concepts of price theory, namely, the phenomenon of price convergence. It extends price convergence to non-price characteristics to argue that the convergence we are witnessing in the market for contract law mirrors price convergence in commodities markets.

Part III also illustrates how state-provided contract law, in the form of the UCC, the CISG, and the New Contract Law of the People’s Republic of China, actually permits and invites customized contract law through the use of default and penalty-default rules. As already indicated, some of the convergence we witness today was conscious and deliberate, as when the New Contract Law of China imported the structure and content of the Vienna Convention.[22] While adoption of these modern codes was largely driven by industry, the replication of the rules, and especially the internal structure of the codes themselves, were driven by jurisdictional competition. Much, if not most, of this convergence, however, has been privately driven. For example, parties around the world have employed choice of law clauses to funnel the commercial law of the State of New York into agreements having nothing else to do with New York, the United States, or even the common law.[23]

Part IV will explore the broader convergence of commercial law in areas beyond the law of contracts. In particular, it will consider the effect that blockchain technology has had, and will continue to have, on the other Articles of the UCC beyond Article 2 contracts for the sale of goods. As technology is brought to bear on the central questions at the heart of commercial law, parties are increasingly empowered to provide their own solutions. This Part will show how commercial law is not only increasingly customized and privatized, but that it is also beginning to converge with its origins in the Law Merchant.[24]

In other words, commercial law is about to come “full circle.”

I. The Market for Contract Law

A. An Old Company in a New Market

Barclays is a bank. In fact, it is an iconic financial firm. Founded in 1690, it is the sixth oldest existing bank in the world and the second oldest English bank.[25] In addition to being old, Barclays is quite large. It operates branches in forty different countries and has over 120,000 employees. With €1.3 trillion in assets, it is Britain’s second largest bank and the sixth largest bank in Europe.[26] Because banks must satisfy regulators and concerns of investors and depositors, Barclays is, like most banks, very conservative.

Furthermore, Barclays is powerful. According to one study, Barclays is the most powerful transnational corporation in terms of ownership of global financial institutions.[27] As a result, Barclays exercises substantial corporate control and influence over global financial stability and market competition.[28]

Despite being very old, very large, very English, very powerful, and very conservative, Barclays has developed a reputation for being among the first to spot key technological innovations in the marketplace. Barclays financed the world’s first industrial steam railway.[29] Barclays also introduced the first credit card issued in the United Kingdom, the “Barclaycard,” on June 29, 1966.[30] The first cash machine (now known as an “automatic teller machine” or “ATM”) ever deployed anywhere in the world was installed by Barclays at one of its branches in Enfield, north of London, in 1967.[31] In short, Barclays has long been a leader in innovation and financial technology or “FinTech.”[32]

So, it should come as no surprise that Barclays has become a leader in the world of “smart contracts.” In 2016, Barclays initiated a pilot program to standardize derivatives transactions between banks on a “smart contracts” platform.[33] A derivative is essentially a trading contract between two or more parties that can take many forms and is based on an underlying asset.[34] Using blockchain technology, Barclays could engage in self-enforcing derivatives transactions with other financial institutions employing the same smart contract platform to complete the transactions without the intervention of lawyers, courts, or law enforcement officers.[35]

In 2017, the International Swaps and Derivatives Association (the “ISDA”) issued a whitepaper entitled Smart Contracts and Distributed Ledger – A Legal Perspective.[36] In it, the ISDA called for standardized smart contract templates and distributed ledger platforms for all financial institutions participating in such trades.[37] Known as the “Common Domain Model” (the “CDM”), it would reduce the time associated with drafting and implementing derivative and swap agreements and their associated disclosures from approximately twenty days to about four hours.[38] Barclays is leading the effort to employ the CDM by drafting and promulgating standard form smart contracts to dramatically increase the efficiency of derivative finance.[39] Barclays is also exploring ways to expand the use of smart contracts to other financial services.[40] It is true that even standard derivative contracts require extensive paperwork.[41] This paperwork, however, is largely required by financial regulators and not by the transactions or transactors themselves.[42]

In short, one of the oldest, largest, most venerable, most regulated, and, therefore, most conservative companies on the planet has adopted smart contracts and blockchain technology to pursue one of its core business lines. Today, transactions in the form of smart contracts already number in the hundreds of millions.[43] The Ethereum platform, one of the many platforms for the development of smart contracts, has already processed over one trillion dollars in smart contract transactions, averaging over $2 billion per day.[44] Like ATMs, smart contracts are suddenly “mainstream.”

B. What Is a “Smart Contract?”

As smart contracts are increasingly employed to substitute, or supplement, traditional contracts, it is important to know two things about them. First, it is important to have an understanding of what smart contracts are. Second, it is important to know what a smart contract can and cannot do.

A “smart contract” is a piece of executable computer code that stores rules of a transaction and automatically verifies the fulfillment of those rules on a network of computers which execute the contract logic.[45] To substitute for traditional legal enforcement, most smart contracts rely upon blockchain technology.[46] Blockchain technology enables businesses to build self-executing agreements, allowing them to electronically program a contract to execute a transaction or payment only when the conditions of that business’s contract have been met.[47] Smart contracts are written in several high-level programming languages and are most often used to implement a contract between two parties where the execution is guaranteed by each node on the network.[48] This allows enterprises to transact directly with each other on private blockchains, using select terms and agreements, without having to utilize a third party—or courts of law—for enforcement.[49]

The key characteristics of smart contracts are that they are:

Immutable. Thanks to the blockchain, smart contracts can never be changed or altered unless agreed upon by the proper parties.[50] Furthermore, the contracts are visible to the entire blockchain network. No one can break or change the contract without permission, because any change would require changes to all other blocks in the sequence. And since the blockchain is continuously being built, changes or “hacks” become increasingly difficult with each additional block.[51] This builds trust and reduces opportunities for fraud.[52]

Automated. By eliminating the intermediaries required to validate a typical business contract, businesses running private enterprise blockchains can process and settle more transactions than traditional exchanges.[53] In other words, smart contracts are automated.

Distributed. In order for the smart contract to be validated, every member of the network has to agree as to the terms of the transaction and that the called-upon performance has been rendered.[54] This means that funds are always released when—and only when—the terms of a contract are met.[55]

By using blockchain technology, then, the parties to a smart contract are without the need for governmental institutions to enforce their terms. Smart contracts are said to be self-enforcing because satisfaction of the required performance triggers the counterparty’s performance automatically. We can think of a smart contract as a type of “electronic escrow,” but without a human escrow agent.[56]

The existence of self-executing agreements does not, in itself, suggest that there is no role at all for governmentally-based law enforcement. The law of property, for example, undergirds the resultant product of electronic assets transformed into tangible ones. Nevertheless, even the law of property has substitutes made possible by blockchain technology, since cryptocurrency assets can be kept under lock and key through digital cryptography.[57] In fact, of the ten most transacted smart contracts, four represent the issuance of securities or shares in companies through what have come to be known as initial coin offerings (“ICOs”).[58] An ICO is the blockchain equivalent of an initial public offering (“IPO”), except that, instead of shares of stock in the listed company, investors receive tokens—assets representing a share of the issuing company—that have value because of the self-executing code built into the ICO smart contract.[59] When the issuing company hits the encoded benchmarks or performance targets, the ICO smart contract triggers payment on the tokens.[60] Like shares of stock, tokens can be traded on exchanges, or bought back by the issuing company.[61] Even these secondary transactions are typically governed by and executed through subsequent smart contracts.[62]

In sum, smart contracts are self-executing computer codes, set in motion by parties to a transaction which is witnessed and validated by third parties at nodes on a blockchain network. If one party to the transaction performs its duties required under the contract, the performance is observed and validated by third parties, which then triggers the counterparty’s performance (payment) automatically. If, however, the first party fails to perform as called for in the agreement, this breach will likewise be observed by third parties to the transaction, and payment by the counterparty will be blocked. This all occurs without the guns, gunpowder, bullets, and threat of physical violence that is the essential characteristic of traditional governmentally-enforced law.[63]

II. Competition in the Market to Supply Contract Law

A. The History of Competition in the Market for Contract Law

Smart contracts are just the latest competitor to state-provided contract law. This competition is nothing new. In his recent book, The Dignity of Commerce, contract scholar Nathan Oman traces the origins of modern contract law to the Elizabethan era and a court decision known as Slade’s Case in 1603.[64] This is a common—but odd—choice of a starting point for a few reasons. First, the choice of Slade’s Case as the birth of modern contract law treats the enforcement of informal promises, known as assumpsit at the time, as though it occurred to the Law Lords from a bolt of divine inspiration, entirely ignoring the historical and legal context which led to the Slade’s Case decision. Second, and more importantly, to locate the enforcement of informal promises in the hands of Royal Courts of the Strand in London is to look at it through the distinctly twenty-first century perspective of state-created law. In other words, Oman sees Slade’s Case as the beginning, because he, and other modern contract scholars like him, cannot contemplate that modern contract law and its enforcement might have originated outside of the institutions of the state.

In fact, it did.

Modern contract law is the product of competition between law providers in the market for law. The medieval common-law action of assumpsit arose at a time when plaintiffs had grown increasingly frustrated with the rigidities of the common law courts and its writ system.[65] Initially, in order to bring suit in the king’s courts of law, a plaintiff needed to assert a cause of action.[66] This phrase was the shorthand that evolved from the understanding that the king had a monopoly on the legitimized use of physical violence, and if one wanted him to exercise violence on one’s behalf, a plaintiff would have to show just cause as to why the king should take such action.[67]

The original causes of action reflected the principle concern of the Norman kings, namely, the quiet enjoyment of profits from their lands.[68] After William the Conqueror saw victory at the Battle of Hastings, he ordered that all of his newly acquired lands be recorded.[69] The Domesday Book became the first land title recording system in the Western world in 1086, just twenty years after the Norman conquest.[70]

In keeping with this obsession with land and the wealth it generated, the earliest actions in the king’s courts were actions involving land. As Theodore Frank Thomas Plucknett put it in A Concise History of the Common Law:

Of these civil pleas, then, those which first received the attention of the King’s Court were pleas of land. Reasons of state demanded that the Crown through its court should have a firm control of the land; the common law, therefore, was first the law of land before it could become the law of the land.[71]

The purpose and function of these writs in the Norman courts are obvious; if someone was improperly in possession of land, such possession interfered with the wealth-generating ability of the rightful holder, who could then no longer support the king with taxes.[72] The writ of trespass was clearly a “just cause as to why the king should take such action.”

Trespass was soon expanded because it became apparent that the wealth-generating capacity of land could be interfered with by more than just the wrongful taking of possession. If an ox and cart were necessary to till the soil, and if an interloper destroyed or disabled the rightful holder’s ox and cart, then tax revenue would be lost once again. So, the writ of trespass was further expanded to an additional writ, namely, the writ of trespass-on-the-case.[73]

After the initial actions in trespass and trespass-on-the-case were expanded to entertain complaints of injuries not rooted in real property, three promise-based writs emerged, namely, the writs of debt, detinue, and covenant.[74] The “just cause as to why the king should take such action” in these promise-based cases is less obvious. Still, if a land holder had arranged to have crops stored at harvest time, and the mill which promised to store the grain failed to make the space available, resulting in the loss of the grain, then the use of the land to generate wealth had gone to waste.[75] These three writs provided a remedy in such cases.[76]

The writ of debt was the first of the three to emerge.[77] It allowed a plaintiff to bring an action rooted in the notion that if a defendant had borrowed money and failed to pay it back, then the plaintiff could petition the king’s courts to force the defendant to do so.[78] Soon, the king’s judges found it impossible to preclude similar treatment when a plaintiff’s chattels were borrowed and detained, like an unrepaid debt. The writ of detinue was born to address wrongful detention of such property.[79]

In addition to these two types of writs, which dealt with physical property, in the form of money (specie) or chattels, that was improperly held by one who had promised to return them, a third writ arose. This writ involved a solemn, formal promise to do or sell something. Such promises, written out on parchment at a time when few could read or write, involved considerable time, thought, and resources. A scribe would be hired to write out the promises exchanged, and a wax seal was dripped onto the parchment.[80] For identification, one or both of the parties making the promise would impress the wax seal with his “signet” ring bearing his family crest and thereby assuring authenticity.[81] This “signet-ture” provided yet another just cause as to why the king should take such action, namely, to avoid a breach of an oath taken before God.[82] Accordingly, this third promissory writ came to be known as covenant.[83]

While these extensions and additions to the original writ of trespass expanded the channels through which promises might be enforced, they remained so rigid that they put legal enforcement of promises out of the reach of all but a few. The principle mechanism for enforcing promises for those who could afford to resort to the courts was through an action in debt.[84] But the writ of debt was in itself a circuitous route to enforcement of a promise. The writ required the demonstration that a debt was owed by the defendant to the plaintiff.[85] This was accomplished through the use of a conditional bond.[86] When the original promise was made, the defendant also promised that if the promise was not performed, such lack of performance would give rise to a penal bond.[87] The penal bond was the debt that would serve as the basis for the writ.[88] In short, promises were not enforced directly; they were enforced indirectly, the breach of which served as the condition precedent for the owing of the penal bond.

The other avenue available to plaintiffs was an action in deceit.[89] This attenuated writ of trespass-on-the-case required a demonstration that the defendant had made a promise designed to induce the plaintiff to rely upon it.[90] The writ also required a showing that the promise was a false one, made so as to deceive the plaintiff to his detriment.[91] This use of the action in deceit came to be known as assumpsit, for the enforcement of obligations freely assumed.[92] By the late sixteenth century, actions in deceit had become a routine, if indirect, method for enforcing informal promises.[93]

These indirect methods of promise enforcement did not arise in isolation. At the same time that the Royal Courts of Justice on the Strand in London were insisting upon the rigidities of the writ system, plaintiffs began to avail themselves of an alternative source of enforcement, namely, the Ecclesiastical Courts of the Roman Catholic Church, and later, the Church of England.[94]

The Church courts had long maintained jurisdiction over spiritual matters.[95] Although the Gallicanism movement sought to diminish the power of the Church relative to states throughout the Middle Ages, the Church succeeded in preserving its spiritual jurisdiction.[96] Accordingly, matters deemed spiritual—marriage, education, and clerical authority—were brought to them for resolution.[97] Soon, plaintiffs frustrated by the rigidities of the writ system began to realize that the breach of a promise could be viewed as more than just a civil wrong. Indeed, it could reveal something much deeper about the party in breach. A promise could be seen as a vow, and a vow as a type of oath. As famously noted in the historical fictional account of Saint Thomas More, A Man for All Seasons, “[w]hat is an oath then but words that we say to God?”[98]

In other words, a breach of a promise could reveal a very serious sin. That sin came to be known as a “breach of faith,” an action available in the ecclesiastical courts.[99]

The bishops and priests who heard these actions soon developed an appropriate remedy for plaintiffs bringing these cases.[100] If found guilty of a breach of faith, a defendant could be ordered to do penance. Penance, in the Middle Ages, would be unfamiliar to the faithful of the twentieth century. It often involved public displays of self-mutilation, flagellation, or other forms of physical punishment. It was to be avoided at all costs.[101]

Fortunately, the clerics of the ecclesiastical courts made available to guilty defendants an alternative to public penance. For the right price, a penitent could purchase an indulgence.[102] These documents declared that the Church had determined that the sin of the penitent had been “indulged” and therefore forgiven.[103] Early on, the fees for indulgences bore an uncanny resemblance to the harm claimed by the plaintiffs in breach of faith cases, with a slight “upcharge,” presumably for the costs of administration.[104] The fees were then paid to the plaintiffs who brought the breach of faith actions to make them whole for being so victimized by the sin of the defendants.[105]

Soon, plaintiffs realized that the action in breach of faith was a more direct and affordable mechanism for enforcing promises. They fled in droves to the Church courts. The king’s courts of law, which were fiscally supported entirely by (and dependent upon) the fees generated from the cases brought, felt the sting of this competition.[106] By 1596, when John Slade brought his case against Humphrey Morley, the writing was on the wall.[107] The decision to recognize the action in assumpsit without the filing of a writ of debt was necessary to the survival of the courts of law. In other words, the recognition and creation of the action in assumpsit, the result of Slade’s Case, was little more than a competitive response to the market movement toward the ecclesiastical courts.[108] The courts of law recognized informal promises because their chief competitor, the ecclesiastical courts, already did. Failure to enforce informal promises would mean an end to the courts of law themselves.[109]

With the decision in Slade’s Case, the state won back its market share.[110] It further entrenched its market position by becoming a subsidized provider of law. While Tudor and Elizabethan courts relied on fees from litigants for support, modern courts of law are largely supported by taxpayers. So, unlike the church courts of the Middle Ages, competitors in the market of supplying contract law today must overcome a competitive cost advantage held by the state and its monopoly on the legitimized use of physical violence.[111] It is precisely this subsidy that makes it impossible for Oman and other contemporary contracts scholars to envision the supply of contract law as a market, let alone a competitive one.[112]

B. Competition at the Margins in the Market for Contract Law

Until recently, such a competitive advantage seemed insurmountable, except in very narrow circumstances. Those circumstances exist at the margins, where the contracts to be enforced are either so small as to make even the subsidized enforcement untenable, or so large as to make enforcement by the state untrustworthy.

Examples of small contract enforcement are ubiquitous. They typically involve what have come to be called “micro-contracts”—agreements measured in pennies or very small dollar amounts.[113] These kinds of agreements typically involve self-enforcing mechanisms that are relatively inexpensive to deploy, particularly over millions or billions of transactions.[114] The Chinese behemoth Tencent, the largest company in all of Asia by market capitalization and revenue, was founded as a start-up just a few short years ago in 1998.[115] Its meteoric growth has been due, in large part, to its ingenious, scalable business model—the inspiration for its name.[116] As described by one of Tencent’s five founders, billionaire Charles Chen, the company was designed to make as little as “ten cents per transaction, but with a billion customers making hundreds of ten cent transactions each.”[117] As the largest producer of games in the world, the leading mobile communications application in the world (WeChat), and the second leading payment system in the world (WeChat Pay), Tencent has created an addictive environment deemed essential to life in the twenty-first century.[118] Failure to comply with Tencent terms of use or to pay a bill on the system results in suspension or termination of service.[119] No court costs are necessary when the product has its own enforcement mechanism.

Examples of contracts at the other end of the spectrum are not as numerous, but they exist nevertheless. The most commonly cited example is the enforcement of bargains within the New York diamond dealers association.[120] As University of Chicago Law School Professor Lisa Bernstein has documented, the diamond dealers have established their own “extralegal” system for enforcement of contracts.[121] Diamond dealers agree to settle their disputes regarding transactions with each other within their own private tribunals.[122] The desire for continued, intergenerational participation in the diamond business motivates conformity to this agreement. Dealers who violate this system by bringing suit in state courts are effectively banished from further participation in the industry.[123] The diamond courts apply their own laws of contract and impose their own remedies and penalties.[124] For diamond dealers within a closed community such as theirs, the private system of enforcement is an effective competitor to the taxpayer-subsidized contract regime of the state.

Private contract enforcement systems are not, themselves, new. The system described by Bernstein mirrors the medieval trans-Mediterranean contract enforcement system uncovered by Stanford economist Avner Greif.[125] According to Greif, an effective and efficient system of contract enforcement emerged among a community of traders across the Maghreb in North Africa during the eleventh century.[126] Records discovered in a recovered genizah of a synagogue excavated in Cairo in the late nineteenth century document the details of a trans-Mediterranean network of traders and their agents, all of whom conducted trade across the Mediterranean world for over one hundred years.[127] The Maghribi merchants would engage agents to transport their wares across the Mediterranean to Europe, sell them, and return with the proceeds of the sale.[128] This system persisted because of enforcement of the agency contracts through a reputation mechanism and a network of synagogue-based tribunals.[129] If a trader-agent were to abscond with the proceeds of sale, the aggrieved merchant would bring his case before the Maghribi tribunal. An adjudication against the trader-agent would result in banishment from the trans-Mediterranean trade network.[130]

This punishment was effective for two reasons. First, the network of synagogues across the Maghreb allowed for transmission of the news of the offending trader-agent and his description.[131] Second, the trans-Mediterranean trade was so profitable that most trader-agents would not risk losing participation due to an adverse judgment in the tribunals.[132] In fact, intergenerational continuation of the trade effectively curtailed “end-game” behavior of trader-agents, since most hoped to pass the business down to their children.[133]

What is most important to remember about the trans-Mediterranean trade and contract enforcement within it is that it was not, and could not be, provided by any state.[134] No state controlled the Mediterranean during the eleventh century, and no governmental authority could be appealed to in order to gain effective enforcement of contracts. The law of the Maghribi traders was private and associational, enforced by reputation mechanisms and private sanctions.[135]

In sum, the market for the provision of contract law has long been characterized by competition. This competition often came from non-state suppliers of contract law, chosen both ex ante (the Maghribi traders and diamond dealers) or ex post (the ecclesiastical courts and the action for breach of faith). As if this were not enough, states themselves competed—and continue to compete—in the market for the provision of contract law.

C. Jurisdictional Competition in the Market for Contract Law

As demonstrated above, there is increasing competition in the market for the supply of contract law. Although the market for the supply of contract law is not, as of yet, in a state of perfect competition, it is clear that it is trending in that direction. To be sure, the taxpayer-subsidized advantage of state providers of contract law tends to distort this competition, at least in the short run. Potential market participants are discouraged from market entry by the mere existence of the cost advantage afforded to the state. Even in the absence of competition between state and private providers of contract law, there has long been competition between state providers of contract law.[136] This jurisdictional competition has perhaps provided more momentum towards convergence in contract law than any technological advancement to date.

There is ample evidence that, when the Founding Generation drafted the Constitution of the United States, they were intimately familiar with Adam Smith’s arguments in favor of jurisdictional competition between courts systems, as well as the jurisdictional competition between the ecclesiastical courts and the law courts of the Tudor and Elizabethan eras.[137] Although constitutional historians and scholars generally agree that the Founders never clearly articulated a theory of jurisdictional competition during the convention or the debates leading up to it, it is nonetheless inescapable that they were familiar with the concept from English and continental law and history.[138] In fact, the structure of American federalism reflects the admiration and trust the Founders had for jurisdictional competition. This trust is evident in the Federalist Papers, as well as in the structure of the Constitution itself.[139]

The Framers of the American Constitution demonstrated their admiration for jurisdictional competition by limiting the federal government’s ability to encroach on common law causes of action. By establishing a government of limited, enumerated powers, the Founders left most of day-to-day jurisdictional authority to the states.[140] In fact, Hamilton and Madison characterized jurisdictional competition through federalism in The Federalist Papers “as a form of government that encourages two sovereigns to compete for the people’s affection.”[141] In such a system, it would be necessary to have a capable judiciary to referee the inevitable disputes that would arise between these competitive sovereigns. Even before the powers of taxation and the military, the courts were the primary institution through which the authority of the state and national governments were made manifest in the early Republic. According to Hamilton, the courts were the medium through which the states and the federal government brought their agency to the people. Therefore, in Hamilton’s view, the courts were the

most powerful, most universal and most attractive source of popular obedience and attachment. It is [the judicial branch,] which[,] . . . being the immediate and visible guardian of life and property[,] . . . contributes more than any other circumstance to impressing upon the minds of the people affection, esteem, and reverence towards the government.[142]

This jurisdictional competition envisioned by the Founders has played out in the area of contract law. In fact, it played out so well that, throughout the nineteenth and early-twentieth centuries, neighboring states developed disparate laws of commerce.[143] As transportation technology improved, however, the wide range of commercial regimes across the United States proved problematic for the growth of interstate commerce.[144] It was in response to these differences in commercial laws from state to state that led business leaders to push for a uniform law of commerce.[145] The result was the UCC.[146]

The UCC can be thought of as the product of the nineteenth–century movement to harmonize and make uniform the laws of the states. The UCC is a joint product of the American Law Institute (the “ALI”), a private non–profit group of law professors, practicing lawyers, and judges, and the National Conference of Commissioners on Uniform State Laws (the “NCCUSL”).[147] It took ten years to draft the UCC and another fourteen years to see it adopted by the legislatures of every state except Louisiana, which still uses a version of the Napoleonic Code.[148] The end product was a type of “forced convergence” of the commercial law of the states. While there are minor differences in contract and commercial law across the United States today, these are largely a product of differing court interpretations and applications of the UCC.[149]

Despite this forced convergence imposed upon the states by the UCC, the law of contracts has not stood still. Both jurisdictional competition around the world and competition from technological change have shaken the market forces shaping contract law out of their centuries-long slumber.

III. The Market for Contract Law is Converging

A. Competitive Markets Tend Toward Convergence

Given the historic and continued competition in the market for the provision of contract law, we should not be surprised that we are witnessing the convergence of it. After all, a fundamental precept of price theory that is that competitive markets tend toward convergence.[150] To see why this is so, consider the following thought experiment. Assume that sellers directly decide both the price and the total quantity produced, and buyers respond by deciding how much to buy. This situation is asymmetric between buyers and sellers. Sellers are the ones taking action first—by changing price and quantity produced—and buyers respond to the sellers’ decisions. Despite this, none of the conclusions in our thought experiment hinge on this asymmetry.[151]

For simplicity, assume that both buyers and sellers are able to perceive shortages and gluts and adjust accordingly. In the real world, price fluctuations and increases in demand may be due to inflation or other factors, and this may lead to inappropriate adjustments.[152] Nevertheless, even in the real world, with its deviations from perfect information, non-negligible transaction costs, and irrational or less-than-fully-rational behavior, there is a significant tendency to converge towards a market price.[153]

When the price of a good exceeds the market price, supply exceeds demand. This is a situation of excess supply, or surplus. For instance, in Figure 1 the surplus is given by the length of the segment AB. A situation of surplus has the following effects:

Sellers, experiencing unsold inventory, will tend to reduce the quantity supplied as well as reduce their price. In other words, they move downward and leftward along the supply curve. This may typically happen in two ways: sellers cut down their individual production, and some sellers go out of business.[154] As sellers lower their price, buyers become willing to buy more. In other words, buyers move downward and rightward along the demand curve.[155] This process is expected to continue until the price equals the market price (Pe), at which point the quantity demanded equals the quantity supplied.[156]

When the price of a good is less than the market price, demand exceeds supply. This is a situation of excess demand, shortfall, or scarcity. For instance, in Figure 2, the shortfall (or scarcity) is the length of the segment AB. A situation of scarcity has the following effects:

Sellers, seeing the competition among buyers for the commodity, will tend to raise the price. Simultaneously, seeing the unmet demand, they will tend to increase the quantity produced. In other words, they move upward and rightward along the supply curve. This may typically happen in two ways: existing sellers will increase their individual production, and new sellers will enter the market.[157] As sellers increase their price, demand falls. In other words, buyers move upward and leftward along the demand curve.[158] This process is expected to continue until the price equals the market price (Pe), at which point demand equals supply.[159]

In other words, in a market characterized by competition, the goods or services available for sale are subject to price convergence.[160] As the information about competitors and the prices of their products become known, market participants act to out-compete their competitors, whether they be suppliers or consumers.[161] How rapidly convergence occurs depends on the amount of market information available to sellers and buyers, as well as the frequency with which they interact and collect information.[162]

B. Contract Law Is Converging Toward “Customization”

Like any market characterized by competition, the market for contract law is tending toward convergence. While perfectly competitive markets move toward price convergence relatively quickly, other markets, including the market for contract law, may move more slowly. This is because consumers often require more time, expertise, or intermediaries to become aware of disparities in non-price terms and to then act in a way that results in convergence.[163] In short, just as competitive markets result in price convergence over time, all competitive markets result in non-price convergence.

What exactly does non-price convergence mean? Price theory provides an implicit answer to this question. Since in a market that approaches perfect competition all goods are indistinguishable and suppliers are “price takers,” all characteristics of the goods in question, including all terms, must be the same.[164] In other words, in a competitive market in which suppliers are term and price takers, all products by all suppliers will tend towards fungibility and substitutability on all margins.[165]

To see why this must be so, reconsider our thought experiment above. If, instead of prices, we use some non-price characteristic of the good, say, length, we can see that competitive markets respond in precisely the same way as they do when prices deviate from the competitive level. Sellers whose product is too long or too short will not sell as much as those whose product is the “right” length. Over time, competition will cause suppliers of the product to migrate toward the length that sells best. In other words, although convergence is most transparent on the margin of price, in a competitive market, all products converge to conform on all margins.[166]

Let us return once again to the examples used with Figures 1 and 2. But instead of prices that are too high or too low, let’s think about a market involving warranty terms. If we are truly in a competitive market, then all terms of the contracts in the market—price, length, and warranty, for example—would converge toward each other.

We can demonstrate this with an example involving a warranty term that is too restrictive (meaning that if something goes wrong with the goods sold, the seller will, at best, refund only the purchase price). When the warranty for a good is more restrictive than the market warranty, supply exceeds demand. This is a situation of excess supply, or surplus. In Figure 3, the surplus is given by the length of the segment AB.

We can depict such a circumstance as follows:

Sellers, experiencing unsold inventory, will tend to reduce the quantity supplied as well as reduce the restrictiveness (in other words, increase the generosity) of their warranty. In other words, they move downward and leftward along the supply curve. This may typically happen in two ways: sellers cut down their individual production, and some sellers go out of business.[167] As sellers increase the generosity of their warranties, buyers become willing to buy more. In other words, buyers move downward and rightward along the demand curve.[168]

On the other hand, when the warranty for a good is more generous than the market warranty, demand exceeds supply. This is a situation of excess demand, shortfall, or scarcity. For instance, in Figure 4, the shortfall (or, scarcity) is the length of the segment AB. A situation of scarcity has the following effects:

Sellers, seeing the competition among buyers for the commodity, will tend to make their warranty less generous (more restrictive). Simultaneously, seeing the unmet demand, they will tend to increase the quantity produced. In other words, they move upward and rightward along the supply curve. This may typically happen in two ways: existing sellers will increase their individual production, and new sellers will enter the market.[169] As sellers increase the restrictiveness of their warranties, demand falls. In other words, buyers move upward and leftward along the demand curve.[170] This process is expected to continue until the warranty term equals the market warranty term (We), at which point demand equals supply.[171]

In other words, in a market characterized by competition, the goods or services available for sale are subject to term convergence in the same way that they are subject to price convergence. As the information about competitors and the warranties for their products become known, market participants act to outcompete their competitors, whether they be suppliers or consumers.[172] How rapidly convergence occurs depends on the amount of information available to sellers and buyers about their market, as well as the frequency with which they interact and collect information.[173]

While it is not the case that the market for contract law is characterized by perfect competition, it is the case that the market for contract law is becoming increasingly competitive. If this is true, then it stands to reason that as the market for contract law becomes ever more competitive, the characteristics of contract law will converge upon an equilibrium of contract law. And since, to date, the process of creating and enforcing contracts has become ever more deferential to the will and needs of the transactors, the resultant convergence will be upon a form of law replete with humility. In short, contract law is becoming ever more “customized” or “bespoke.”

IV. “Custom” Contracting in the UCC, the CISG, and China

A. The Humility of the UCC

If merchants were to design a code of law to promote trade while deferring to their own superior knowledge and experience, they could do worse than what they currently have with the UCC. In fact, it may be argued that merchants did, indirectly, have a hand in its design. The UCC is the product of a longstanding movement to codify commercial law.[174] But commercial law did not appear out of nowhere. Commercial law in the United States has its origins in the common law of England, which drew its principles of commercial law from the Law Merchant.[175]

The Chief Reporter of the UCC was Columbia University Law Professor Karl Llewelyn.[176] Professor Llewelyn was chosen by the commissioners by consensus.[177] He had a reputation for being a careful and widely respected scholar of commercial law. As one of the commissioners put it, Professor Llewelyn

insisted that the provisions of the Code should be drafted from the standpoint of what actually takes place from day to day in the commercial world rather than from the standpoint of what appeared in statutes and decisions.[178]

In short, the UCC was designed to reflect the expectations of merchants, just as those expectations had been shaped by prior law and practice.

What shaped merchant expectations, however, were the already existing norms and rules associated with merchant law found both in the common law and its predecessor. The association of the common law to the Law Merchant is largely credited to one Scotsman, namely, William Murray, Lord Mansfield.[179] Lord Mansfield became Chief Judge of the Court of King’s Bench in 1756.[180] Before Lord Mansfield, merchant issues were decided by judges “who thought in terms of haystacks and horses,” and who conferred upon “the central area of commercial law for more than a century the flavour of land and manure rather than of commerce.”[181] Through Lord Mansfield, the “appropriate incorporation of the customs of merchants into the common law became an established fact.”[182]

As both the UCC and the common law incorporation of the Law Merchant look to the actual practices of merchants themselves, it is not a stretch to claim that both reflect a certain humility. Rather than impose the will and understandings of central planners upon merchant transactions, the UCC—like the Law Merchant before it—constantly seeks to be informed by the customs and practices of the merchants themselves.

Nowhere does the UCC reflect this humility more than in the Article 2 provisions governing contracts for the sale of goods.[183] Various rules within Article 2 defer to “usage of trade” to determine unwritten or unspoken terms of an agreement.[184] When it comes to interpretation of open or ambiguous terms, the drafters of the UCC make this deference explicit. In Official Comment 1 to section 2-208, the drafters explain that the purpose of the statute is to discover what the parties themselves had in mind when they entered into their agreement.[185] According to Comment 1:

The parties themselves know best what they have meant by their words of agreement and their action under that agreement is the best indication of what that meaning was. This section thus rounds out the set of factors which determines the meaning of the “agreement” and therefore also of the “unless otherwise agreed” qualification to various provisions of this Article.[186]

In other words, after centuries of crafting law to meet the needs of merchant commerce, the interpretive provisions of the UCC “tailor” the law to the specific understandings and meanings of the merchant parties to the transaction themselves. If the law can be said to be “tailored” to the customs, understandings, practices, and behavior of the parties, can “bespoke” law be far behind?

B. The Conformity of the CISG

The success of the UCC in the United States led multinational corporations around the world wanting more. Toward this end, a global push was initiated for the adoption of a body of international law that would do for global trade what the UCC had done for the American economy. That initiative resulted in the CISG in 1980, which came into effect in 1988.[187]

The CISG is a uniform law governing the international sale of goods in much the same way that Article 2 of the UCC governs the sale of goods within the United States. It has been adopted by 89 states to date, albeit with the glaring absences of the United Kingdom, Hong Kong, and Taiwan.[188] Although the United States was the eleventh country to accede to the terms of the CISG, it would be misleading to suggest that the “late” adoption by the United States reflects its lack of influence in the drafting of the convention. Nothing could be further from the truth.

The truth is that multinational corporations, most of which were based in the United States, pined for a uniform law governing the international sale of goods which would lower the costs of transactions in a way similar to that which occurred after the adoption of the UCC. In response to the demand for a uniform law of sales for international trade, the Vienna Convention adopted an approach that, for the most part, embraces the UCC.[189] Indeed, as one commercial law scholar put it, “one may view the Convention as a triumph of the [UCC]’s approach to contract law.”[190]

To be sure, there are some differences between the CISG and the UCC. For example, the UCC incorporates a variant of the Statute of Frauds for the sale of goods over the statutory limit of $500.[191] Contracts involving goods valued beyond that amount must be evidenced by a signed writing or other documentary record.[192] The CISG has no writing requirement resembling the Statute of Frauds and leaves the parties to prove the existence of a contract through witnesses or other evidence. Along the same lines, the UCC contains its own version of the parol evidence rule.[193] The UCC’s version of the rule, it’s other provisions, is very deferential to the specific understandings of the parties. It allows even “a final expression of their agreement” to “be explained or supplemented (a) by course of performance, course of dealing, or usage of trade (Section 1-303); and (b) by evidence of consistent additional terms unless the court finds the writing to have been intended also as a complete and exclusive statement of the terms of the agreement.”[194] The CISG has no similar parol evidence rule, and the United States Court of Appeals for the Eleventh Circuit has ruled that the parol evidence rule does not apply to contracts governed by the CISG.[195]

Nevertheless, the CISG reflects the same deferential approach to contract formation and interpretation embodied in the UCC. Neither body of law has specific minimum requirements for contract formation, and both will find the existence of a contract where the actions of the parties demonstrate an understanding that a contract was formed.[196] In fact, the CISG is so deferential that it has been criticized for leaving too much to local interpretation.[197] Still, the CISG reflects a type of convergence, namely, the desire to tailor the law of commercial transactions to the needs and desires of merchants.

C. The New Contract Law of the People’s Republic of China

In 1999, the National People’s Congress of the People’s Republic of China enacted the New Contract Law (officially referred to as the “Uniform Contract Law”) to take effect on October 1, 1999.[198] The purposes of the law were three-fold. First, the New Contract Law was designed to eliminate the inconsistencies that characterized the “three pillars” of contract law which preceded it.[199] Second, the New Contract Law was a required step in the full restoration of the contract law regime that existed prior to Mao Zedong’s rule and the Cultural Revolution.[200] This restoration was deemed a necessary prerequisite for China’s membership in the World Trade Organization.[201]

Third, and most importantly, the New Contract Law was designed to replicate the success of the more advanced economies found in the United States and Europe.[202] China was the ninth signatory to the CISG, and with ratification by the United States and Italy, the treaty came into force on January 1, 1988.[203]

The goal of the New Contract Law was simple, namely, to rebuild the legal infrastructure of an economy devastated by Mao Zedong’s Cultural Revolution. In 1966, after a long series of failed communist “five-year-plans” that left China one of the poorest nations in the world, it became clear to Mao Zedong that forces had been arrayed to replace his leadership.[204] In response, Mao initiated a purge of his political rivals. He employed the youth of the nation to root out more senior, established political leaders at the local, regional, and national levels.[205] Mao designated this youth movement “the Red Guards,” and they proceeded to dismantle what was left of Chinese civil society after the civil war and the failed five-year plan of the Great Leap Forward.[206]

Among the institutions purged by the Cultural Revolution, few were as decimated as the legal infrastructure of China. Mao closed all law schools, as well as courts and tribunals.[207] Mao’s Cultural Revolution jailed and executed countless judges and lawyers, and he declared that the Chinese people should “[d]epend on the rule of man, not the rule of law.”[208] Furthermore,

the law and legal institutions were dismembered in a frenzy of hysterical fanaticism. Beginning in 1966, all law schools were closed. Attorneys, judges, courtroom personnel and law teachers were forced to work in the countryside . . . . The Red Guards . . . freely searched houses without legal process, arrested anyone, investigated anything, and sentenced, imprisoned, and frequently executed.[209]

As China crawled out from under the devastation of Mao’s Cultural Revolution, its new leadership sought a new direction. When Deng Xiaoping emerged triumphant after a power struggle with the “Gang of Four,” he sought to reestablish a functioning legal system.[210] Although his predecessor and Mao’s successor, Hua Guofeng, ordered the drafting of a new constitution and the reopening of China’s law schools in 1977, the reconstruction of the legal system took shape as one of the central components Deng’s vision for a prosperous China.[211] Since the Cultural Revolution purged the country of trained lawyers and judges, a new judiciary was appointed from the ranks of military officers.[212] These untrained judges and lawyers struggled to resolve cases when the nation was devoid of a system of laws.[213]

Deng Xiaoping saw the rule of law as the common thread coursing through the developed economies of the world, and he wanted China to emulate their prosperity. Deng set upon a course to provide China with a coherent body of law, including commercial law, to pursue a brighter economic future.[214] First, he ordered the drafting of yet another constitution in 1982.[215] Second, he oversaw the development of a legal code designed to govern the commercial transactions that he hoped would follow.[216] Of these, three are of importance for our understanding of convergence in contract law.

Prior to the enactment of the New Contract Law in 1999, contracts in China were governed by a set of three laws. Known as “the [T]hree [P]illars of Chinese Contract Law,” these were (1) the Economic Contract Law of 1981 (the “ECL”); (2) the Foreign Economic Contract Law of 1985 (the “FECL”); and (3) the Technology Contract Law of 1987 (the “TCL”).[217] The ECL was designed to solve the immediate need for a law to govern contracts between Chinese parties domestically.[218] The need was so urgent that it was promulgated while the newest constitution was still under consideration. As the Chinese economy grew during the 1980s, it became clear that the ECL might not be appropriate for contracts involving foreign direct investment. As a result, the National People’s Congress enacted the FECL to govern contracts between Chinese nationals and foreigners.[219] Later, as the national and strategic importance of technology and technology transfer became apparent, the National People’s Congress adopted the TCL to govern contracts in which the subject matter involved technology.[220]

The piecemeal nature of Chinese contract law, as contained in the Three Pillars, became problematic. Since each of the laws was promulgated at a different time by a different National People’s Congress, they reflected different and evolving understandings of the role of contract law within economic policy.[221] Furthermore, the fact that they were directed at different kinds of parties or contracts meant that they often contained gaps or conflicted with each other.[222] As China’s economy exploded with growth and complexity throughout the 1990s, the need for a comprehensive contract law gained urgency.[223]

The response to this pressure was the New Contract Law. When it took effect, it rendered the Three Pillars obsolete. To be sure, the New Contract Law is sweeping in scope, rolling in all of the subject matter from the prior three codes and expanding upon them to cover new ones.[224] The New Contract Law is comprised of two main parts, namely, (1) general provisions and (2) specific provisions.[225] As the name implies, the general provisions lay down rules of law applicable to all contracts in general. These include rules governing formation, interpretation, validity, assignment, breach, conditions, and choice of law.[226] The specific provisions are comprised of fifteen chapters, each of which addresses the following subject matter areas: “sales, donation[s], lease[s], financial lease[s], [labor], supply of electricity, gas and water, loan[s], technology, storage, warehousing, carriage, construction . . . , commission, brokerage and intermediation.”[227] In addition to its general and specific provisions, the New Contract Law is supplemented by the General Principles of Civil Law of 1986 (the “GPCL”).[228] The GPCL contains general rules governing all civil-juristic acts that are applicable to contracts.[229] Furthermore, there is a host of other laws that touch upon or affect contracts that come to bear on agreements in China, including consumer protection, advertising, insurance, and competition laws, to name just a few.[230]

What is most interesting about the New Contract Law is not just that it replaced and superseded the Three Pillars, but also that it has origins in the Law Merchant. China’s New Contract Law is arguably a direct descendant of the medieval lex mercatoria, or the Law Merchant. It can be so characterized because of the influence of the CISG in its formation, and, therefore indirectly, the UCC. Both the CISG and the UCC were contemplated by the drafters of the New Contract Law.[231] As a result, we should not be surprised that China’s New Contract Law reflects many of the characteristics of both the CISG and the UCC, including their deference to the knowledge and understandings of the parties to the contract.

China’s New Contract Law has been characterized as the beneficiary of “double transplantation.”[232] The first of these transplants came about when China acceded to the CISG.[233] Doing so subjected Chinese companies engaged in international commercial transactions to a regime rooted in the deferential humility of the American UCC. The second transplant is subtler. It can be said to have occurred in the actual drafting of the New Contract Law since the process and the substance of the comprehensive code tracked that of the CISG itself.[234]

The New Contract Law of China, however, is not a wholesale adoption of the CISG or the UCC. Indeed, it departs from these bodies of law in important ways. In fact, the most important departure may reflect the competitive nature of the market for the provision of contract law and the convergence resulting from this competition. The most distinguishing characteristic of the New Contract Law revolves around the remedy for breach. Unlike the CISG and the UCC before it, both of which provide the award of monetary damages as the presumptive form of relief, the New Contract Law actually awards specific performance as a matter of course.[235]

To be sure, specific performance was also the presumptive form of relief under the Three Pillars. In fact, the New Contract Law actually relaxes the standard and affords the plaintiff in a contract action a choice of remedy, unless: “(i) performance is impossible in law or in fact; (ii) the subject matter of the obligation does not lend itself to enforcement by specific performance or the cost of performance is excessive; (iii) the obligee does not require performance within a reasonable time.”[236]

The Chinese departure away from the money damages routinely awarded under Western contract regimes in favor of specific performance reflects a trend already under way in the United States. Under the common law, specific performance was once reserved for contracts where the subject matter could be demonstrated to be “unique”—like a work of art or a family heirloom.[237] Over time, this limitation has softened such that specific performance could be had when the victim of the breach could show difficulty in obtaining a substitute for the promised performance.[238]

The UCC expressly softens the standard for specific performance from the more rigid common law rule. UCC section 2-716 provides that:

(1) Specific performance may be decreed where the goods are unique or in other proper circumstances . . . .

[And] (3) [t]he buyer has a right of replevin for goods identified to the contract if after reasonable effort he is unable to effect cover for such goods or the circumstances reasonably indicate that such effort will be unavailing or if the goods have been shipped under reservation and satisfaction of the security interest in them has been made or tendered.[239]

The UCC, then, adds “other proper circumstances,” “goods identified to the contract,” a limitation to when cover fails, and “goods . . . shipped under reservation” to the common law requirement of uniqueness.[240] This broadened availability of specific performance mirrors the deference to subjective value discussed earlier in UCC section 2-208’s provisions governing the hierarchy of interpretation.[241] Specific performance can be seen as tailoring relief for breach of contract to the specific parties involved. The tailored approach of specific performance, in short, approximates bespoke law.

IV. Convergence Across All of Commercial Law

Contract law is not the only area of commercial law where we are witnessing convergence due to increasing competition in the market for law provision. Indeed, nearly every aspect of commercial law is witnessing convergence. Payment systems, secured transactions, warehouse receipts and bills of lading, and even bankruptcy law are being disrupted by more efficient technology and alternative sources of commercial law. These competitive forces are leading to a convergence upon “customized” commercial law, in which parties themselves can enjoy the benefits of their own bespoke legal regime.

A. Payment Systems and Cryptocurrencies

The most dramatic change in commercial law over the last twenty years has been in the area of payment systems. The UCC provisions governing negotiable instruments, notes, bank drafts, letters of credit, and even electronic funds transfers, have been rendered all but obsolete. This development is due to the rise of electronic funds transfers for large payments, credit and debit cards for small payments, and ACH transfers for everything in between.

UCC Articles 3, 4, and 4A provide for transactions involving bank drafts, credit and debit cards, and electronic funds transfers.[242] But as bank drafts go the way of the buggy whip, electronic payment methods have become ubiquitous. In fact, it is not clear that the provisions of Article 4A actually cover mobile telephone transfer payments, whether or not they occur over networks such as Tencent’s WeChat (in China), Zelle or PayPal (in the United States), or MPESA (in Kenya, Pakistan, and Afghanistan).[243]

Furthermore, while these new forms of electronic money transfer and payment systems are closely-related offshoots of traditional ones, the new payment systems represented by blockchain technology and the cryptocurrencies that blockchain makes possible are not. Whether the UCC—or another commercial code—governs their workings seems increasingly irrelevant since these newer systems provide their own “law,” complete with “rules” of property and mechanisms of enforcement. With blockchain technology, parties to a payment transaction can not only design their own (bespoke) “law,” but they can also design their own (bespoke) “money.”

B. Secured Transactions and Smart-Keys

Security interests are ubiquitous in commercial finance, and accordingly, they are amply provided for in commercial law. A typical security interest arises when a lender is granted a residual property interest in chattel property, which is triggered if and when the borrower defaults on the loan.[244] These arrangements were once referred to as “chattel mortgage[s]” and were frowned upon by courts of law.[245] They gained recognition in the United States only after the passage of chattel mortgage acts in the states along the East Coast.[246] Although the chattel mortgage is relatively young by commercial law standards (the first American chattel mortgage act was passed in 1820), the security interest in collateral is a standard concept in debt finance, and is employed by lenders to all classes of borrowers, from the largest corporations down to the smallest consumer.[247] In the United States, security interests are governed by UCC Article 9.[248]

The value of a security interest is that it provides a secured creditor two remedies in addition to those available to unsecured creditors, namely, (1) priority and (2) “self-help.”[249] Priority means that the secured creditor, upon the debtor’s default, has first claim on the proceeds from the sale of the collateral.[250] If the value of the collateral exceeds the secured creditor’s claim, the residual redounds to the debtor or the debtor’s other creditors.[251] In order to enjoy priority, however, a secured creditor or an officer of the courts must seize and sell the collateral.[252] In short, priority provides a secured creditor with some measure of peace of mind, but the value of the collateral remains inchoate until some (usually expensive) legal process is taken.

Self-help, on the other hand, is a slightly more salient remedy for some secured creditors, depending upon the collateral and debtor involved. By “self-help,” the law of debtors and creditors means that a secured creditor may take or disable the collateral as a means of securing payment of the underlying debt. Self-help can be effected through repossession or the padlocking of equipment, or by other means of disrupting the use of the collateral. The most important limitation on the remedy of self-help is that it cannot be exercised when it results in a “breach-of-the-peace.”[253]

Today, the practice of lending against collateral is becoming increasingly mechanized. Technology is quickly supplanting Article 9 of the UCC with respect to levying on property.[254] If a lender wants a cheap, fast, and effective way to exercise self-help, one way to do so is to employ a “smart key.” A smart key is software or other electronic device that affords the secured creditor the ability to disable the collateral remotely, without ever approaching the physical proximity of the collateral or the debtor.[255] If the collateral is a piece of manufacturing machinery, for example, a smart key might allow the secured creditor to turn off—and keep off—that machine until the debt obligation is paid or the credit account is brought current.[256] Smart keys have been used to secure loans on automobiles, computer software, boats, factory equipment, and buildings.[257] With smart keys, secured creditors can tailor their own bespoke self-help remedy to suit their particular situation.

C. Warehouse Receipts, Bills of Lading, and Blockchain

Warehouse receipts and bills of lading are particular types of negotiable instruments and were among the earliest forms of paper money.[258] In commercial law, they are referred to as “document[s] of title.”[259] In the United States, documents of title are governed by UCC Article 7.[260] A warehouse receipt is precisely as the name implies: the owner of goods places those goods with a warehouse for safe keeping. In return, the warehouse gives the owner of the goods a warehouse receipt, entitling the owner, or the owner’s assignee, to collect the goods at a later date.[261]

A bill of lading is similar to a warehouse receipt but involves goods in transit. The term “lading” is the Old English word for what we today call “loading.”[262] As goods were loaded onto a ship for transport, a bill of lading was issued to the shipper of the goods indicating title to those goods. The goods could then be shipped and collected by the shipper or the shipper’s assignee, namely, the buyer.[263]

Because both warehouse receipts and bills of lading could be assigned or “negotiated” to a third party, they, along with merchant promissory notes, became the first forms of paper money used in the Middle Ages.[264] These instruments entitled the bearer to the goods detailed in the document.[265]

One of the earliest uses of blockchain technology was to track shipments, authenticity, and quality across space and time. Today, everything from diamonds to fish are shipped and tracked with blockchain certainty.[266] Blockchain technology can, in a very reliable and trustworthy fashion, track and transfer goods, both in warehouses and in transit. Accordingly, the need for warehouse receipts and bills of lading have diminished. Today, the owner or shipper of goods can reliably keep or send those goods without resorting to UCC Article 7 to resolve disputes regarding title, risk of loss, or payment. All of those functions can now be governed by the blockchain, and owners, sellers, shippers, buyers, and everyone else along the “chain of custody” can craft a tracking system perfectly aligned with their own particular needs. Such a system might even be called a “bespoke hub-and-spoke” system.

D. Corporate Reorganization and “Pre-Packs”

One of the most ubiquitous transformations of commercial practice to customization does not involve advanced technology at all. Instead, it has occurred in the area of bankruptcy law. Large Chapter 11 corporate reorganizations have effectively become the most customized law of the twenty-first century because of the rise of “pre-packs.” A “pre-pack,” or “pre-packaged bankruptcy,” is a pre-negotiated reorganization that uses the bankruptcy courts as a rubber stamp for the true “creditors’ bargain.”[267] A debtor or its key creditors initiate the negotiations when it becomes clear that the debtor’s operations and revenue stream can no longer support its debt load, but an adjustment of its capital structure might make it profitable.[268] The key creditors also know that the provisions of Chapter 11 are designed to promote negotiations, even with the debtor’s smallest (in terms of claims) creditors who are given “hold-out” power under the code.[269]

The purpose of the pre-pack negotiations is to carefully tailor a plan of reorganization that maximizes the going concern value of the company but offers would-be hold outs enough to prevent them from blocking court confirmation of the plan.[270] If the small creditors try to extract “nuisance value” from the other creditors by holding out, the pre-packaged plan is designed to affect “cramdown” on the objecting creditor by providing more under the plan than the objector would have received in a liquidation of the company’s assets. In short, we can think of pre-packs as the original bespoke law.

Conclusion

The rise of smart contracts has reintroduced fierce competition in the market for the provision of contract law. This competition once existed between the church and the state, but the state has long since wrested control over the provision of contract law from competing institutions. The state has solidified its monopoly over the provision of contract law, but, over time and at the margins, consumers of contract law have found substitutes. This slippage in the elasticity of demand for contract law has led the state to gradually make concessions to the consumers of contract law, increasingly tailoring it to the needs of the parties to the transactions involved.

These concessions were not enough. Today, parties are, quite literally, taking the law of contract into their own hands by crafting their own, tailor-made, self-enforcing “smart contracts” to suit their own particular circumstances. As this happens, jurisdictions around the world are engaged in a competitive response, providing more malleable contract law to suit the needs of the parties they hope to serve and govern.

[*] *. Joseph A. Matson Dean of the Law School and Professor of Law, University of Notre Dame; William F. Baxter – Visa International Professor of Law, Emeritus, Stanford University. I thank Brian Bix, Michelle Boardman, Curtis Bridgeman, Vanessa Casado Perez, Miriam Cherry, Yun-chien Chang, Jonathan Choi, Billy Christmas, Robert Cooter, Giuseppe Dari-Mattiacci, Charles Delmotte, Richard Epstein, Andrew Gold, Robert Hilman, Stefanie Jung, Kimberly Krawiec, Saul Levmore, Alan Meese, Robert Miller, Adam Mossoff, Mark Movesian, Nate Oman, Ariel Porat, Mario Rizzo, Aaron Simowitz, Henry Smith, and participants at New York University Classical Liberal Institute’s symposium on Convergence and Divergence in Private Law.

[1]. See generally Henri Pirenne, Medieval Cities: Their Origins and the Revival of Trade (Frank D. Halsey trans., Princeton Univ. Press 1974) (1927) (arguing that the expansion of medieval cities was attributable to a growth in continental trade).

[2]. See Bruce L. Benson, The Spontaneous Evolution of Commercial Law, 55 S. Econ. J. 644, 647 (1989) (“The development of commercial law was almost entirely left up to the merchants themselves.”); see also J.H. Baker, The Law Merchant and the Common Law before 1700, 38 Cambridge L.J. 295, 303 (1979) (“By avoiding the forms which could be sued upon . . . in the common-law courts, [the merchants] gave themselves more flexibility.”). Legal historian Emily Kadens disputes the widely-disseminated notion that the Law Merchant was an organic body of law dissociated from principalities and other government enforcement institutions. Emily Kadens, The Myth of the Customary Law Merchant, 90 Tex. L. Rev. 1153, 1153–61 (2012).

[3]. See F.C.T. Tudsbury, Law Merchant and the Common Law, 34 L.Q. Rev. 392, 394 (1918) (“[T]he usages of merchants and traders . . . ratified by the decisions of courts of law . . . has become engrafted upon, or incorporated into, the Common Law, and may thus be said to form part of it.” (quoting Cockburn, C.J., in Goodwin v. Robarts (1875) 10 L.R. Exch. 337 (Eng.))).

[4]. See Charles M. Cook, The American Codification Movement 109 (1981).

[5]. Id.; see also Wienczyslaw J. Wagner, Codification of Law in Europe and the Codification Movement in the Middle of the Nineteenth Century in the United States, 2 St. Louis U. L.J. 335, 341 (1953) (dating the origins of the German codification movement to the Prussian Civil Code of 1794).

[6]. See Johannes W. Flume, Law and Commerce: The Evolution of Codified Business Law in Europe, 2 Comp. Legal Hist. 45, 57 (2014) (detailing the promulgation of the German Commercial Code of 1861); Gunther A. Weiss, The Enchantment of Codification in the Common-Law World, 25 Yale J. Int’l L. 435, 52027 (2000) (tracing the development of the UCC to the history of codification efforts in both Europe and the United States).

[7]. See Dame Mary Arden, Time for an English Commercial Code?, 56 Cambridge L.J. 516, 517 (1997) (providing a brief history of the origins of the American Law Institute and the UCC).

[8]. See William A. Schnader, Why the Commercial Code Should Be “Uniform,” 20 Wash. & Lee L. Rev. 237, 238 (1963) (explaining the constitutional and practical limitations surrounding the adoption of uniform laws in the United States).

[9]. See E. Allan Farnsworth, The Vienna Convention: History and Scope, 18 Int’l Law. 17, 17–19 (1985) (detailing the origins of the CISG).

[10]. See id. at 17–18.

[11]. See Schnader, supra note 8, at 238.

[12]. See Wang Jingen & Larry A. DiMatteo, Chinese Reception and Transplantation of Western Contract Law, 34 Berkeley J. Int’l L. 44, 46 (2016) (explaining the Western origins—which include the UCC—of Chinese contract law).

[13]. Id.

[14]. The ius commune, or the “common law of Europe,” was the general understanding of law that was spread across continental Europe after the reception of Roman law in the eleventh century. This occurred after the Code of Justinian was discovered in the libraries of Toledo and Cordoba during the reconquista of Spain. Lawyers and judges trained in Roman law in the newly-formed universities of Europe spread the same or “common” principles of law wherever they traveled to practice. See Mary Ann Glendon et al., Comparative Legal Traditions in a Nutshell 2834 (4th ed. 2015).

[15]. See Margaret J. Radin, Boilerplate: The Fine Print, Vanishing Rights, and the Rule of Law 1215, 40 n.7 (2013) (implying that modern word processing technology has empowered contract drafters to produce increasingly complex standard form contracts).

[16]. See G. Marcus Cole, Rational Consumer Ignorance: When and Why Consumers Should Agree to Form Contracts Without Even Reading Them, 11 J.L. Econ. & Pol’y 413, 421 (2015) (arguing that the marginal consumer for each contract term will “police” the terms offered in standard form contracts by comparing forms).

[17]. See generally Mayukh Mukhopadhyay, Ethereum Smart Contract Development (2018) (detailing extensively the various functions of smart contracts).

[18]. The “Law of One Price” (or “LOOP,” for short) is the economic principle that states that, in the absence of trade frictions like transportation costs or tariffs, a commodity traded in a competitive market bears the same price wherever it is bought or sold, anywhere in the world. See N. Gregory Mankiw, Principles of Economics 686 (6th ed. 2012). The Law of One Price serves as the basis for the Theory of Purchasing Power Parity, namely, that a basket of commodity-goods should cost the same around the world but for the productivity of the country in which the purchase is made. See Dennis V. Kadochnikov, Gustav Cassel’s Purchasing Power Parity Doctrine in the Context of His Views on International Economic Policy Coordination, 20 Eur. J. Hist. Econ. Thought 1101, 1111 (2013).

[19]. See generally Gareth W. Peters & Efstathios Panayi, Understanding Modern Banking Ledgers Through Blockchain Technologies: Future of Transaction Processing and Smart Contracts on the Internet of Money, in Banking Beyond Banks and Money: A Guide to Banking in the Twenty-First Century 239 (Paolo Tasca et al. eds., 2016).

[20]. See Learned Hand, Book Review, 35 Harv. L. Rev. 479, 479 (1922) (reviewing Benjamin N. Cardozo, The Nature of the Judicial Process (1921)) (describing the common law as “a monument slowly raised, like a coral reef, from the minute accretions of past individuals, of whom each built upon the relics which his predecessors left, and in his turn left a foundation upon which his successors might work”); see also G. Marcus Cole, Shopping for Law in a Coasean Market, 1 N.Y.U. J.L. & Liberty 111, 123 (2005) (characterizing the common law as a cumulative spontaneous order which grows over time by accretion).

[21]. See 1 F.A. Hayek, Law, Legislation & Liberty 36–38 (1973) (describing the two sources of order as “planned” orders and “spontaneous” orders).

[22]. See Jingen & DiMatteo, supra note 12, at 46.

[23]. See Gilles Cuniberti, The International Market for Contracts: The Most Attractive Contract Laws, 34 Nw. J. Int’l L. & Bus. 455, 457 (2014) (presenting an empirical analysis of choice-of-law clauses that shows New York law dominates all others); Theodore Eisenberg & Geoffrey P. Miller, The Flight to New York: An Empirical Study of Choice of Law and Choice of Forum Clauses in Publicly-Held Companies’ Contracts, 30 Cardozo L. Rev. 1475, 1478 (2009); Geoffrey P. Miller & Theodore Eisenberg, The Market for Contracts, 30 Cardozo L. Rev. 2073, 2073 (2009).

[24]. See generally Leon E. Trakman, Law Merchant: The Evolution of Commercial Law (1983) (tracing the origins of modern commercial law to the Law Merchant of the Middle Ages).

[25]. The only existing British bank older than Barclays is C. Hoare & Co., founded in London in 1672. 7 Oldest Banks in the World, Oldest.org, http://www.oldest.org/structures/banks (last visited July 10, 2019).

[26]. JahanZaib Mehmood & Francis Garrido, Data Dispatch EMEA: Europe’s Fifty Largest Banks by Assets, S&P Global (April 16, 2018, 12:27 PM), https://platform.mi.spglobal.com/web/client?
auth=inherit#news/article?id=44033607&cdid=A-44033607-14380.

[27]. Stefania Vitali et al., The Network of Global Corporate Control, PLoS ONE (Oct. 26, 2011), https://doi.org/10.1371/journal.pone.0025995.

[28]. Id.

[29]. Press Release, All Aboard With Barclays’ New £500m Fund for Northern SMEs, Barclays (May 31, 2018, 4:00 PM), https://home.barclays/news/2018/05/thornton/#back=%2Fcontent%2Fhome-barclays%2Fen%2Fhome%2Fresults.html%3Fq%3Dlaunches%2Bmajor%2Bnorthern%2Bpowerhouse%2Bboat%26_charset_%3DUTF-8%26offset%3D0%26origin%3Dhelp.barclays.co.uk (“Barclays has been helping businesses across the North to succeed since the dawn of the Industrial Revolution . . . , when we financed the world’s first steam locomotive passenger railway between Stockton and Darlington.” (quoting Barclays CEO, Jes Staley)).

[30]. Rupert Jones, Put It on the Plastic: Barclaycard, the UK’s First Credit Card, Turns Fifty, The Guardian (June 29, 2016, 12:58 PM), https://www.theguardian.com/money/2016/jun/29/put-it-plastic-barclaycard-uk-first-credit-card-50-1966.

[31]. Brian Milligan, The Man Who Invented the Cash Machine, BBC News (June 25, 2007, 5:35 AM), http://news.bbc.co.uk/2/hi/6230194.stm.

[32]. Barclays technology archive blog is worth a read, available at Technology, Barclays: Group Archives, https://www.archive.barclays.com/items/show/5412 (last visited July 20, 2019).

[33]. Ian Allison, Barclays’ Smart Contract Templates Stars in First Ever Public Demo of R3’s Corda Platform, Int’l. Bus. Times, https://www.ibtimes.co.uk/barclays-smart-contract-templates-heralds-first-ever-public-demo-r3s-corda-platform-1555329 (last updated July 11, 2016, 11:44 AM).

[34]. See James Chen, Derivative, Investopedia, https://www.investopedia.com/terms/d/deriv
ative.asp (last updated May 19, 2019); Definition of A Derivative, Econ. Times, https://economic
times.indiatimes.com/definition/derivatives (last visited May 10, 2019).

[35]. Arjun Kharpal, Barclays Used Blockchain Tech to Trade Derivatives, CNBC (Apr. 19, 2016, 6:37 AM), https://www.cnbc.com/2016/04/19/barclays-used-blockchain-tech-to-trade-derivatives.html.

[36]. ISDA & Linklaters, Whitepaper: Smart Contracts and Distributed Ledger – A Legal Perspective (2017), https://www.isda.org/a/6EKDE/smart-contracts-and-distributed-ledger-a-legal-perspective.pdf.

[37]. Id. at 3, 19–20.

[38]. See From Concept to Reality, ISDA Q., Aug. 2018, at 33, 33–34.

[39]. See Ketaki Dixit, Barclays Uses ISDA Standard for Blockchain Derivatives, Ambcrypto (Apr. 27, 2018), https://ambcrypto.com/barclays-uses-isda-standard-for-blockchain-derivatives.

[40]. Id.

[41]. See Derivative Contracts Sample Clauses, Law Insider, https://www.lawinsider.com/clause/
derivative-contracts (last visited July 20, 2019) (providing various standard form terms for derivative contracts).

[42]. See Dixit, supra note 39.

[43]. See What 29,985,328 Transactions Say About the State of Smart Contracts on Ethereum, Medium (Oct. 28, 2018) [hereinafter 29,985,328 Transactions], https://blog.sfox.com/what-29-985-328-transactions-say-about-the-state-of-smart-contracts-on-ethereum-2ebdba4bea1c.

[44]. Ethereum Transacting $166 Million Per Hour, 53% to Smart Contract Dapps, Trustnodes (May 6, 2018, 1:06 PM), https://www.trustnodes.com/2018/05/06/ethereum-transacting-166-million-per-hour-53-smart-contract-dapps.

[45]. See Max Raskin, The Law and Legality of Smart Contracts, 1 Geo. L. Tech. Rev. 305, 309 (2017) (“A smart contract is an agreement whose execution is automated.”).

[46]. Tsui S. Ng, Blockchain and Beyond: Smart Contracts, Am. B. Ass’n. (Sept. 28, 2017), https://www.americanbar.org/groups/business_law/publications/blt/2017/09/09_ng.

[47]. Raskin, supra note 45, at 310.

[48]. See Jason Wong, The 6 Most Common Blockchain Programming Languages, Very Possible (Aug. 14, 2018), https://www.verypossible.com/blog/the-6-most-common-blockchain-programming-languages.

[49]. See Raskin, supra note 45, at 333.

[50]. Ng, supra note 46.

[51]. Robert van Mölken, Blockchain Across Oracle 144 (2019) (explaining that “one of the advantages of a public blockchain is immutability . . . ,” which “has the same effect on smart contracts”); Thomas J. Rush, Smart Contracts Are Immutable—That’s Amazing…and It Sucks, Medium (May 13, 2016), https://medium.com/@tjayrush/smart-contracts-are-immutable-thats-amazing-and-it-sucks-e0fbc7b0ec16; Marcin Zduniak, Blockchain Immutability: Behind Smart Contracts, Espeo Blockchain: Blog (May 29, 2018), https://espeoblockchain.com/blog/ethereum-smart-contract.

[52]. See Loi Luu et al., Making Smart Contracts Smarter, Proc. 2016 ACM SIGSAC Conf. Computer & Comm. Sec. 254, 255 (2016), https://loiluu.com/papers/oyente.pdf (“In contrast to distributed applications that can be patched when bugs are detected, smart contracts are irreversible and immutable.”).

[53]. See Lin William Cong & Zhiguo He, Blockchain Disruptions and Smart Contracts 9 (Nat’l Bureau of Econ. Research, Working Paper No. 24399, Apr. 2018), https://www.nber.org/papers/w24399.

[54]. Deloitte, Impacts of the Blockchain on Fund Distribution 68 (2018), https://www2.deloitte.com/content/dam/Deloitte/lu/Documents/technology/lu_impact-blockchain-fund-distribution.pdf; Mayank Pratap, Everything You Need to Know About Smart Contracts: A Beginner’s Guide, Hackernoon (Aug. 27, 2018), https://hackernoon.com/everything-you-need-to-know-about-smart-contracts-a-beginners-guide-c13cc138378a.

[55]. See What is an Enterprise Blockchain Smart Contract?, BlockApps (July 30, 2018), https://blockapps.net/enterprise-blockchain-smart-contract.

[56]. See Jackson Ng, Escrow Service as a Smart Contract: The Business Logic, Medium: Coinmonks (May 19, 2018), https://medium.com/coinmonks/escrow-service-as-a-smart-contract-the-business-logic-5b678ebe1955 (explaining how smart contracts operate to replace escrow agents in transactions that previously required them).

[57]. See, e.g., Niels Ferguson et al., Cryptography Engineering: Design Principles and Practical Applications 4 (2010) (explaining the “lock” and “key” operation of public key and private key cryptography).

[58]. See 29,985,328 Transactions, supra note 43.

[59]. See Andrew Romans, Masters of Blockchain and Initial Coin Offerings 4 (2018) (describing ICOs as investment vehicles comparable to IPOs).

[60]. Id.

[61]. Id.

[62]. Id.

[63]. See Christoph Menke, Law and Violence, 22 Law & Literature 1, 1 (2010) (“Law is itself a kind of violence . . . .”); see also Stephen L. Carter, Law Puts Us All in Same Danger As Eric Garner, Bloomberg (Dec. 4, 2014, 7:56 AM), https://www.bloomberg.com/opinion/articles/2014-12-04/law-puts-us-all-in-same-danger-as-eric-garner (“[T]he police go armed to enforce the will of the state, and if you resist, they might kill you.”).

[64]. Nathan B. Oman, The Dignity of Commerce: Markets and the Moral Foundations of Contract Law 6 (2016) (describing John Slade’s case against Humphrey Morley before the Devon Assizes as the origin of modern contract law).

[65]. See, e.g., Julia Rudolph, Common Law and Enlightenment in England, 16891750, at 130 (2013) (“Over time a body of equity law developed in English Chancery, providing new kinds of remedies where the rigidity of common law—with its closed system of Latin writs and formalized pleading in law French—meant that either that new problems could not be dealt with at common law, or that the common law would produce an unjust result.”); see also E. Allan Farnsworth, Contracts 12–18 (4th ed. 2004) (describing the evolution of the action of assumpsit from the common law tort writ of trespass).

[66]. See Farnsworth, supra note 65, at 12.

[67]. See A.W. Brian Simpson, A History of the Common Law of Contract: The Rise of the Action of Assumpsit 199–202 (Clarendon Press 1987) (describing the meaning of the phrase “cause of action”).

[68]. See George W. Keeton, The Norman Conquest and the Common Law 91–92 (Barnes & Noble 1966) (quoting F. W. Maitland’s claim that, “[i]f English history is to be understood, the law of Domesday Book must be understood”).

[69]. Id. at 91.

[70]. See Maurice Keen, The Penguin History of Medieval Europe 107 (Penguin Books 1991) (“Norman direction, working within Anglo-Saxon traditions of local administration, had produced in Domesday Book the most complete survey ever made of the resources in men and wealth of a medieval kingdom.”).

[71]. Theodore Frank Thomas Plucknett, A Concise History of the Common Law 355 (Liberty Fund 5th ed. 2010) (emphasis in the original); see also J.H. Baker, An Introduction to English Legal History 41 (4th ed. 2005) (describing the complex contortions engaged in by the king’s courts in order to fit plaintiffs cases into the writ of trespass before other forms of action were developed). Technically, the writ of right was also contemporaneous with the writ of trespass and was an action to recover dispossessed land as opposed to land that was trespassed upon. See Martin Shapiro, Courts: A Comparative and Political Analysis 81 (1981).

[72]. See S.F.C. Milsom, Historical Foundations of the Common Law 22 (1969).

[73]. Id. at 256–61.

[74]. Id. at 211–13; see also S.J. Stoljar, A History of Contract at Common Law 3 (1975) (tracing the origins of modern contract law to the original writs of debt, detinue, and covenant).

[75]. See, e.g., Nurse v. Barns (1664) 83 Eng. Rep. 43 (KB) 43 (holding a mill owner liable for incidental damages suffered by a lessee of iron mills worth twenty pounds should be granted damages of five hundred pounds for stock purchased in reliance on the contract).

[76]. See Stoljar, supra note 74, at 4–5.

[77]. See Simpson, supra note 67, at 203; see also Christine Desan, Making Money: Coin, Currency, and the Coming of Capitalism 86 (2014) (“The ‘earliest writ of a contractual nature to be regularly issued,’ common law debt emerged in the 12th century.” (quoting Simpson, supra note 67, at 53–55)).

[78]. See Desan, supra note 77, at 86.

[79]. See Plucknett, supra note 71, at 400.

[80]. Id.

[81]. Signet rings “were used historically as a seal with a unique family crest to sign documents.” Charlie Gowins-Eglinton, How Signet Rings Went from Traditional Family Heirloom to Modern Must-Have, Telegraph (Aug. 16, 2017, 6:45 AM), https://www.telegraph.co.uk/fashion/style/signet-rings-went-traditional-heirloom-modern-must-have; see also Chritopher Austin, A Brief History of Signet Rings, History Press, https://www.thehistorypress.co.uk/articles/a-brief-history-of-signet-rings (last visited July 20, 2019).

[82]. See Simpson, supra note 67, at 203.

[83]. See Plucknett, supra note 71, at 400.

[84]. See Simpson, supra note 67, at 203.

[85]. See Simpson, supra note 67, at 90.

[86]. Id.

[87]. Id.

[88]. Id.

[89]. Id. at 91.

[90]. Id.

[91]. Id.

[92]. Id.

[93]. Id.

[94]. See Robert B. Ekelund, Jr. & Robert F. Hébert, A History of Economic Theory and Method 56–58 (5th ed. 2007) (asserting that the effects of jurisdictional competition among courts of the Tudor and Elizabethan eras undermined the royal monopolies central to mercantilism).

[95]. Robert E. Rodes, Jr., Secular Cases in the Church Courts: A Historical Survey, 32 Cath. Law. 301, 304 (1989) (explaining that “to get into church court all one had to do was to make the debtor pledge his faith as a Christian,” the breach of which was deemed “fidei laesio, breach of faith”).

[96]. Originating in France in the middle of the fourteenth century, Gallicanism was a movement seeking to wrest civil and religious authority away from the Pope in Rome towards local authorities. See generally Jotham Parsons, The Church in the Republic: Gallicanism and Political Ideology in Renaissance France (2004). For a rich analysis of Gallicanism, see generally Emile Perreau-Saussine, Catholicism and Democracy: An Essay in the History of Political Thought (Richard Rex trans. 2012).

[97]. See Guy Bedouelle, The History of the Church 112–15 (2003) (describing the rise and fall of Gallicanism from the fifteenth through the eighteenth centuries).

[98]. Robert Oxton Bolt, A Man For All Seasons, act 2, sc. 3 (Sir Thomas More, explaining why he will not swear to the Act of Succession, concluding that “[w]hen a man takes an oath . . . he’s holding his own self in his own hands . . . [l]ike water”).

[99]. See Harold J. Berman, Law and Revolution: The Formation of the Western Legal Tradition 516 (1983) (“Canon Law claimed jurisdiction over . . . laity charged with sin and breach of faith . . . .”).

[100]. See Historical Dictionary of Late Medieval England, 1272–1485, at 112–14 (Ronald H. Fritze & William B. Robison eds., 2002).

[101]. See Mary C. Moorman, Indulgences: Luther, Catholicism, and the Imputation of Merit (2017) (ebook) (noting that St. Thomas Aquinas reasoned that the authority granted by Christ to Peter to bind and loose supported the Church’s extension of indulgences, since “whatever remission is granted in the court of the Church holds good in the court of God” (citation omitted)).

[102]. See 4 Sir William Blackstone, Commentaries on the Laws of England 106 (11th ed. 1791) (condemning a Catholic Church for, in the pursuit of money and power, creating “[n]ew-fangled offences” and selling “indulgences . . . to the wealthy” while also “injoin[ing] penance pro salute animae, and commut[ing] that penance for money”).

[103]. See R.N. Swanson, Indulgences in Late Medieval England 56 (2007) (“The power of the pardon rather than any other associations made these indulgences popular.”).

[104]. See R.N. Swanson, Religion and Devotion in Europe, c. 1215c. 1515, at 220 (1997). Swanson provides the following examples of fees paid for indulgences:

For the Jubilee of 1500 the collector [of money for the sale of indulgences], Jasper Ponce, set a sliding scale of charges varying with landed income or the value of moveable goods. For the landed, the costs ranged from £3. 6s. 8d. for incomes over £2000 [(this is an enormous income, that of a high baron)] down to 1s. 4d. for the £20–40 category; for the others from £2 for those with goods over £1,000 down to 1s. for those in the £20–200 group. People falling below £20 paid what they felt able to contribute out of devotion.

[105]. See Daniel Klerman, Jurisdictional Competition and the Evolution of the Common Law, 74 U. Chi. L. Rev. 1179, 1179 (2007) (arguing that, since court fees were the source of revenue for the courts of England, and since plaintiffs chose the courts in which to file suit, “judges and their courts competed by making the law more favorable to plaintiffs”).

[106]. See Edward Peter Stringham & Todd J. Zywicki, Rivalry and Superior Dispatch: An Analysis of Competing Courts in Medieval and Early Modern England, 147 Pub. Choice 497, 498 (2011).

[107]. For this famous case, see generally Slade’s Case (1602) 76 Eng. Rep. 1074 (KB) [hereinafter Slade’s Case].

[108]. See Klerman, supra note 105, at 1181.

[109]. Id. at 1180 (quoting William M. Landes & Richard A. Posner, Adjudication as a Private Good, 8 J. Legal Stud. 235, 254–55 (1979)).

[110]. See Slade’s Case, supra note 107.

[111]. The monopoly over the legitimate use of physical force or the “monopoly on violence” is a core concept of modern political theory and public law. It has its origins in Jean Brodin’s Les Six Livres de la République, published in 1576, and Thomas Hobbes’s Leviathan, published in 1651. For their respective works, see generally Jean Bodin, Les Six Livres de la République (Gérard Mairet ed., 1993) (1576); Thomas Hobbes, The Leviathan (Prometheus Bks. 1988) (1651). It later formed the foundation of Max Weber’s definition of the state as any organization that succeeds in holding the exclusive right to use, threaten, or authorize physical force against residents of its territory. See generally Max Weber, Politics as a Vocation (1919), reprinted in Max Weber: Essays in Sociology 77 (H.H. Gerth & C. Wright Mills eds., trans., 1946), http://polisci2.ucsd.edu/foundation/documents/03

Weber1918.pdf.

[112]. In this context, contract law supplied by government can be said to be “subsidized” by taxpayers, since governmental institutions provide enforcement mechanisms (violence) not at the disposal of private means of enforcement. See Carter, supra note 63.

[113]. See generally Xiaoming Yang et al., Micro-Innovation Strategy: The Case of WeChat, 20 Asian Case Res. J. 401 (2016) (detailing Tencent’s strategy of marketing low-cost consumer innovation to China’s burgeoning population).

[114]. Id. at 403.

[115]. See Salvatore Cantale & Ivy Buche, How Tencent Became the World’s Most Valuable Social Network Firm – with Barely Any Advertising, The Conversation (Jan. 18, 2018, 2:10 PM), http://theconversation.com/how-tencent-became-the-worlds-most-valuable-social-network-firm-with-barely-any-advertising-90334.

[116]. Tencent’s growth has been attributed in large part to its ability to tap into four factors unique to China’s technology sector, namely, (1) scale, (2) openness (to private domestic entrepreneurship), (3) official support of local and central governments, and (4) technology. This combination of factors has been dubbed the SOOT model for growth by Edward Tse. See Edward Tse, China’s Disruptors 71, 83 (2015).

[117]. Interview with Charles Chen, Co-Founder, Tencent, at Stanford Law School (Apr. 20, 2014) (notes on file with author).

[118]. See Rayna Hollander, WeChat Has Hit 1 Billion Monthly Users, Bus. Insider (Mar. 6, 2018, 2:59 PM), https://www.businessinsider.com/wechat-has-hit-1-billion-monthly-active-users-2018-3 (explaining that “[r]oughly 83% of all smartphone users in China use WeChat,” while penetration has reached 93% in Tier 1 cities).

[119]. See, e.g., QQ Number Service Terms of Use, QQ Security Ctr, https://aq.qq.com/en/
appeal/en_appeal_safety (last visited Aug. 29, 2019) (detailing the appeals process for suspension of account service).

[120]. See Lisa Bernstein, Opting Out of the Legal System: Extralegal Contractual Relations in the Diamond Industry, 21 J. Legal Stud. 115, 115 (1992) (describing the private legal order and norms adopted by New York diamond merchants).

[121]. Id.

[122]. Id. at 135.

[123]. Id.

[124]. Id. at 126.

[125]. See Avner Greif, Reputation and Coalitions in Medieval Trade: Evidence on the Maghribi Traders, 49 J. Econ. Hist. 857, 857 (1989) (describing the complex system of trust and reputational sanctions underlying trans-Mediterranean trade during the Middle Ages).

[126]. Id.

[127]. Id. at 86163.

[128]. Id.

[129]. Id.

[130]. Id. at 870.

[131]. Id.

[132]. Id.

[133]. See id.

[134]. Id.

[135]. Id. at 874.

[136]. See Geoffrey P. Miller, Choice of Law as a Precommitment Device, in The Fall and Rise of Freedom of Contract 357, 365 (F.H. Buckley ed., 1999) (asserting that jurisdictions compete knowing that parties are free to adopt their law within contractual choice of law and choice of forum provisions).

[137]. See Samuel Fleischacker, Adam Smith’s Reception Among the American Founders, 1776–1790, 59 Wm. & Mary Q. 897, 897 (2002) (“[T]he American founders were among the earliest readers of [Adam] Smith’s Wealth of Nations, and their readings constitute a significant episode in the history of the book’s reception.”); David Prindle, The Invisible Hand of James Madison, 15 Const. Pol. Econ. 223, 231 (2004) (tying Madison’s exposure to Smith to his writings in The Federalist Papers and arguing that they reflect the influence of Smith’s idea that “competition among self-interested individuals, groups, and institutions, if intelligently structured, can produce the public good”).

[138]. See, e.g., Michael S. Greve, The Upside Down Constitution 134 (2012) (arguing that the legal and educational backgrounds of several of the Framers made exposure to the concept of jurisdictional competition inescapable).

[139]. See, e.g., Michael W. McConnell, Federalism: Evaluating the Founders’ Design, 54 U. Chi. L. Rev. 1484, 1505–06 (1987) (book review) (discussing the Founders’ trust in jurisdictional competition through federalism to protect individual rights, such as freedom of religion).

[140]. Mark Moller, The Checks and Balances of Forum Shopping, 1 Stan. J. Complex Litig. 171, 186 (2012).

[141]. Todd E. Pettys, Competing for the People’s Affection: Federalism’s Forgotten Marketplace, 56 Vand. L. Rev. 329, 352 (2003).

[142]. The Federalist No. 17, at 77 (Alexander Hamilton) (Terence Ball ed., 2003).

[143]. The History of the UCC, Legalinc (May 9, 2018), https://legalinc.com/blog/the-history-of-the-ucc.

[144]. Id.

[145]. Id.

[146]. For a rich, authoritative history of the codification movement and the creation of uniform codes in the United States, see generally Robert A. Stein, Forming a More Perfect Union: A History of the Uniform Laws Commission (2013).

[147]. The NCCUSL, also known as the Uniform Laws Commission, was formed in 1892. About Us, Uniform L. Commission, https://www.uniformlaws.org/aboutulc/overview (last visited July 21, 2019).

[148]. For more on the Louisiana system, see Daniel Engber, Louisiana’s Napoleon Complex, Slate (Sept. 12, 2005, 6:59 PM), https://slate.com/news-and-politics/2005/09/is-louisiana-under-napoleonic-law.html (“[L]aws governing commercial transactions in Louisiana come from the French system, putting them at odds with the parts of the Uniform Commercial Code used by other states.”).

[149]. See, e.g., Brooks Cotton Co. v. Williams, 381 S.W.3d 414, 427–28 (Tenn. Ct. App. 2012) (holding that whether a “farmer” is a “merchant” under the UCC depends upon the circumstances).

[150]. See Peter A. Diamond, A Model of Price Adjustment, 3 J. Econ. Theory 156, 164–65 (1970) (demonstrating that as consumers and sellers in a competitive market encounter prices that are higher or lower than the equilibrium price for any good, they gain information that causes prices to converge to the competitive equilibrium price).

[151]. For experimental proof of this phenomenon, see generally Vernon L. Smith, An Experimental Study of Competitive Market Behavior, 70 J. Pol. Econ. 111 (1962).

[152]. See Jan Tuinstra, Price Dynamics in Equilibrium Models 57–58 (2001) (demonstrating how asymmetric price adjustments work to achieve convergence toward market price equilibrium).

[153]. See Frank M. Machovec, Perfect Competition and the Tranformation of Economics 21 (2003) (explaining that the tendency of markets toward equilibrium is “grounded in man’s success in discovering and overcoming his errors”).

[154]. See Diamond, supra note 150, at 163.

[155]. Id.

[156]. Id. at 164.

[157]. Id. at 165.

[158]. Id.

[159]. Id.

[160]. See Israel M. Kirzner, Competition and Entrepreneurship 219–22 (1973) (demonstrating how price convergence occurs in “a simple market for a single, undifferentiated product of standard quality” called “milk”).

[161]. Id. at 220.

[162]. Id.

[163]. For an exploration into how banks price and control risks with non-price terms in private lending, see generally Philip E. Strahan, Fed. Reserve Bank of N.Y., Staff Report No. 90, Borrower Risk and the Price and Non-Price Terms of Banks Loans (1999), https://www.new
yorkfed.org/medialibrary/media/research/staff_reports/sr90.pdf.

[164]. See Paul Krugman et al., Essentials of Economics 198 (2d ed. 2007) (“In a perfectly competitive market, all market participants, both consumers and producers, are price-takers.”).

[165]. See Fred M. Gotthiel, Principles of Microeconomics 240–41 (7th ed. 2013) (explaining how substitutability and fungibility of goods increases as markets move from monopolistic competition to perfect competition).

[166]. See George G. Djolov, The Economics of Competition: The Race to Monopoly 62–67 (Haworth Press 2006) (explaining how product differentiation creates barriers to, and a departure from, competitive markets).

[167]. See Diamond, supra note 150, at 165.

[168]. Id.

[169]. Id.

[170]. Id.

[171]. Id.

[172]. See Israel M. Kirzner, Entrepreneurial Discovery and the Competitive Market Process: An Austrian Approach, 35 J. Econ. Literature 60, 70 (1997).

[173]. See id. (explaining that the alert “entrepreneur discovers these earlier errors, buys where prices are ‘too low’ and sells where prices are ‘too high,’” such that “low prices are nudged higher, high prices are nudged lower; . . . [s]hortages are filled, surpluses are whittled away; [and] quantity gaps tend to be eliminated in the equilibrative direction”).

[174]. For the authoritative account of the codification movement, see generally Stein, supra note 146.

[175]. See Trakman, supra note 24, at 7 (“Custom, not law, has been the fulcrum of commerce since the origin of exchange.”).

[176]. See generally Arthur L. Corbin, A Tribute to Karl Llewellyn, 71 Yale L.J. 805 (1962) (expounding upon the life of Professor Llewellyn, including his service as Official Reporter of the UCC).

[177]. See William A. Schnader, A Short History of the Preparation and Enactment of the Uniform Commercial Code, 22 U. Miami L. Rev. 1, 4 (1967) (describing the circumstances surrounding the appointment of Professor Llewellyn as Official Reporter).

[178]. Id.

[179]. See S. Todd Lowry, Lord Mansfield and the Law Merchant: Law and Economics in the Eighteenth Century, 7 J. Econ. Issues 605, 60507 (1973).

[180]. Id. at 605.

[181]. Id. at 606 (citation omitted).

[182]. Frederick J. Moreau, The Unwritten Law and Its Writers, 2 Pepp. L. Rev. 213, 242 (1975).

[183]. The UCC is comprised of nine Articles, each with a focus on a particular area of commercial law.

[184]. U.C.C. § 2-208 (Am. Law Inst. & Unif. Law Comm’n, withdrawn 2001).

[185]. See id. § 2-208 cmt. 1.

[186]. Id.

[187]. See Farnsworth, supra note 9, at 17 (explaining the origins of the CISG).

[188]. For the complete list of signatories to the Vienna Convention, see CISG: List of Contracting States, Institute of Int’l Commercial Law, https://iicl.law.pace.edu/cisg/page/cisg-list-contracting-states (last visited July 22, 2019).

[189]. See Lyon L. Brinsmade, American Bar Association Report to the House of Delegates, 18 Int’l Law. 39, 40 (1984) (“[M]any provisions of the Convention are very similar in content and form to those of the [UCC].”); Michael Kabik, Through the Looking-Glass: International Trade in the “Wonderland” of the United Nations Convention on Contracts for the International Sale of Goods, 9 Int’l Tax & Bus. Law. 408, 428–29 (1992) (observing not only that “[m]any of the [CISG]’s provisions . . . similar in approach and content to those of the [UCC],” but also that “the [CISG] is, for the most part, truly a mirror image of the[UCC]”).

[190]. Robert S. Rendell, The New U.N. Convention on International Sales Contracts: An Overview, 15 Brook. J. Int’l L. 23, 42 (1989).

[191]. U.C.C. § 2-201 (Am. Law Inst. & Unif. Law Comm’n 2018).

[192]. Id.

[193]. Id. § 2-202.

[194]. Id.

[195]. MCC-Marble Ceramic Ctr. v. Ceramica Nuova D’Agostino, S.P.A., 114 F.3d 1384, 1388–89 (11th Cir. 1998); CISG Advisory Council Opinion No. 3: Parol Evidence Rule, Plain Meaning Rule, Contractual Merger Clause and the CISG, 17 Pace Int’l L. Rev. 61, 61 (2005) (“The Parol Evidence Rule has not been incorporated into the CISG.”).

[196]. See Aditi Ramesh et al., CISG v. UCC: Key Distinctions and Applications, 7 Bus. Mgmt. Rev. 459, 462 (2016).

[197]. See, e.g., Clayton P. Gillete & Robert E. Scott, The Political Economy of International Sales Law, 25 Int’l Rev. L. & Econ. 446, 474 (2005) (“Uncertainty results not only from the many vague standards, but also from the use of ambiguous language that may have different meanings in different cultures.”).

[198]. Feng Chen, The New Era of Chinese Contract Law: History, Development, and a Comparative Analysis, 27 Brook. J. Int’l L. 153, 168 (2001).

[199]. See Chuan Feng et al., China’s Changing Legal System 129–31 (2016) (explaining the history and operation of the “three pillars” system of Chinese contract law).

[200]. See Volker Behr, Development of a New Legal System in the People’s Republic of China, 67 La. L. Rev. 1161, 1164 (2007) (stating that, under Mao’s Cultural Revolution, “[c]ontracts were considered to be symbols of a capitalistic system; hence, the contract system was abolished”).

[201]. Susan Ariel Aaronson, Is China Killing the WTO?, Int’l Econ., Winter 2010, at 40, 1 (“The rule of law was a key element of China’s accession agreement because trade policymakers understood that how China was governed could distort trade in many of the sectors in which China competes.”). In fact,

[t]he 2001 Protocol on the Accession of the People’s Republic of China explicitly calls on China to “apply and administer in a uniform, impartial, and reasonable manner all its laws, regulations and other measures of the central government as well as local regulations, rules and other measures . . . pertaining to or affecting trade . . . . China shall establish a mechanism under which individuals and enterprises can bring to the attention of the national authorities cases of non-uniform application.” It also calls on China to ensure that “those laws, regulations, and other measures pertaining to and affecting trade . . . shall be enforced.”

Id. (ellipses in original) (quoting Ministerial Conference, Protocol on the Accession of the People’s Republic of China, WTO Doc. WT/L/432 (Nov. 23, 2001)).

[202]. See Chen, supra note 198, at 155–68.

[203]. See Peter Winship, An Introduction to the United Nations Sales Convention, 43 Consumer Fin. L.Q. Rep. 23 (1989), https://www.cisg.law.pace.edu/cisg/biblio/winship2.html (“In accordance with Article 99(1), the convention was to enter into force approximately one year after ten states had become Contracting States.”).

[204]. See Frank Dikötter, Mao’s Great Famine: The History of China’s Most Devastating Disaster Catastrophe, 1958–1962, at 327 (2010) (describing the toll taken by Mao’s economic failures).

[205]. See generally Frank Dikötter, The Cultural Revolution: A People’s History, 1962–1976 (2016) (describing the internal power struggle after the failure of Mao’s The Great Leap Forward).

[206]. See Tang Tsou, The Cultural Revolution and Post-Mao Reforms 73 (1986).

[207]. See Jerome A. Cohen, A Looming Crisis for China’s Legal System, Foreign Pol’y (Feb. 22, 2016, 10:15 AM) https://foreignpolicy.com/2016/02/22/a-looming-crisis-for-chinas-legal-system (“[I]n 1972, there was virtually no legal education—because of the Cultural Revolution, universities were shuttered for a decade.”).

[208]. Shao-Chuan Leng & Hungdah Chiu, Criminal Justice In Post-Mao China 18 (1985) (citation omitted).

[209]. Ralph H. Folsom & John H. Minan, Law in the People’s Republic of China 12 (1989).

[210]. William R. Baerg, Judicial Institutionalization of the Revolution: The Legal Systems of the People’s Republic of China and the Republic of Cuba, 15 Loy. L.A. Int’l & Comp. L. Rev. 233, 242 (1992).

[211]. Id. at 243.

[212]. Id. at 244.

[213]. Id.

[214]. See Andrew Mayer, The Rocky Road to Democracy: A Few Comments on Legal Development in China Since the Cultural Revolution, 6 China L. Rep. 1, 2 (1989).

[215]. Baerg, supra note 210, at 243.

[216]. See Carlos W.H. Lo, Deng Xiaoping’s Ideas on Law: China on the Threshold of a Legal Order, 32 Asian Surv. 649, 650 (1992) (“For Deng after 1979, legal reform was the first step in restoring political order.”).

[217]. Nicole Kornet, Contracting in China: Comparative Observations on Freedom of Contract, Contract Formation, Battle of Forms, and Standard Form Contracts, 14 Electronic J. Comp. L., no. 1, 2010, at 1, 3.

[218]. Id.

[219]. Id.

[220]. Id.

[221]. See Jianfu Chen, Chinese Law: Context and Transformation 58384 (Rev. ed. 2015) (“Clearly the ‘Three Pillars’ system was a complicated one, fraught with many problems . . . [including] the lack and inconsistency of provisions on freedom of contracts . . . .”).

[222]. See Kornet, supra note 217, at 4.

[223]. See Chen, supra note 221, at 284.

[224]. Id.

[225]. Kornet, supra note 217, at 4.

[226]. Id.

[227]. Id.

[228]. Id.

[229]. Id.

[230]. See Patricia Pattison & Daniel Herron, The Mountains Are High and the Emperor Is Far Away: Sanctity of Contract in China, 40 Am. Bus. L.J. 459, 470–71 (2003) (explaining the relationship between the New Contract Law and other laws of general application).

[231]. Chen, supra note 198, at 15354.

[232]. Jingen & DiMatteo, supra note 12, at 52.

[233]. Id.

[234]. Id.

[235]. See John H. Matheson, Convergence, Culture and Contract Law in China, 15 Minn. J. Int’l L. 329, 356 (2006).

[236]. Contract Law of the People’s Republic of China (promulgated by the Standing Comm. Nat’l People’s Cong., Mar. 15, 1999, effective Oct. 1, 1999), art. 110 (China).

[237]. See Alan Schwartz, The Case for Specific Performance, 89 Yale L.J. 271, 272 (1979), https://digitalcommons.law.yale.edu/ylj/vol89/iss2/2 (arguing that specific performance ought to be the presumptive form of relief for breach of contract).

[238]. See, e.g., Sedmak v. Charlie’s Chevrolet, Inc., 622 S.W.2d 694, 699–700 (Mo. Ct. App. 1981) (awarding specific performance of a Corvette pace car to wealthy car collectors with twenty-six other Corvettes in their collection because a substitute was available only at a much higher price and a great distance away).

[239]. U.C.C. § 2-716(1), (3) (Am. Law Inst. & Unif. Law Comm’n 2018).

[240]. Id.

[241]. U.C.C. § 2-208, cmt. 1 (Am. Law Inst. & Unif. Law Comm’n, withdrawn 2013) (“The parties themselves know best what they meant by their words of agreement . . . .”).

[242]. See U.C.C. §§ 3-101–4A-507 (Am. Law Inst. & Unif. Law Comm’n 2018).

[243]. See Ndubuisi Ekekwe, Arrival of AliPay and WeChat Will Challenge MPESA in Kenya, Tekedia (June 19, 2018), https://www.tekedia.com/alipay-wechat-challenge-mpesa-kenya (describing all three mobile payment systems and the choices they afford consumers).

[244]. See George Lee Flint, Jr. & Marie Juliet Alfaro, Secured Transactions History: The Impact of English Smuggling on Chattel Mortgage Acts in the Spanish Borderlands, 37 Val. U. L. Rev. 703, 703 (2003).

[245]. See 1 Grant Gilmore, Security Interests in Personal Property 26 (1999).

[246]. George Lee Flint, Jr. & Marie Juliet Alfaro, Secured Transactions History: The First Chattel Mortgage Acts in the Anglo-American World, 30 Wm. Mitchell L. Rev. 1403, 1405 (2004) (detailing the adoption of the first chattel mortgage acts as an acknowledgment of the growth of secured transactions in the Eastern United States).

[247]. See Gilmore, supra note 245, at 26.

[248]. See U.C.C. §§ 9-101–9-809 (Am. Law Inst. & Unif. Law Comm’n 2018).

[249]. See Adam B. Badawi, Self-Help and the Rules of Engagement, 29 Yale J. on Reg. 1, 7 (2012) (describing the availability of the remedy of self-help to secured creditors).

[250]. See U.C.C. § 9-102(a)(73) (Am. Law Inst. & Unif. Law Comm’n 2018).

[251]. See id.

[252]. For a detailed analysis on the intricacies of self-help, see generally Badawi, supra note 249.

[253]. See id. at 1417.

[254]. See Blockchain-Based Lending, Medium (July 11, 2018), https://media.consensys.net/block
chain-based-lending-1eee5edabe8a (describing the ways in which blockchain technology can facilitate self-help in the context of smart loan agreements).

[255]. See Ben Sparango, How Blockchain Based Lending Could Take Us from Billions to Trillions, Coinmonks (May 20, 2018), https://medium.com/coinmonks/how-blockchain-based-lending-could-take-us-from-billions-to-trillions-a1de3f948c88 (describing the various blockchain based lending platforms).

[256]. Id.

[257]. Id.

[258]. See generally Robert S. Lopez, The Commercial Revolution of the Middle Ages, 950–1350 (Cambridge Univ. Press 1976) (detailing the rise of commercial paper, bills of lading, and warehouse receipts as negotiable instruments during the Middle Ages).

[259]. Sandra Lim, Bill of Lading, Investopedia, https://www.investopedia.com/terms/b/billoflad
ing.asp (last updated Apr. 2019).

[260]. See U.C.C. §§ 7-101–7-704 (Am. Law Inst. & Unif. Law Comm’n 2018).

[261]. See id. § 7-202.

[262]. David Mellinkoff, The Language of the Law 179 (1963) (explaining that the “bill of lading” is derived from the Old English word for “loading”).

[263]. See Richard Aikens et al., Bills of Lading 19–20 (2d ed. 2016) (describing the functions of bills of lading).

[264]. Id.

[265]. Id.

[266]. See, e.g., Vishnu Rajamanickam, Can Blockchain Revolutionize the Bill-of-Lading?, FreightWaves (Dec. 8, 2017), https://www.freightwaves.com/news/2017/12/8/can-blockchain-revol
utionize-the-bill-of-lading (exploring the efficiencies of blockchain bills of lading).

[267]. See Brian L. Betker, An Empirical Examination of Prepackaged Bankruptcy, 24 Fin. Mgmt 3, 3 (1995) (defining a prepackaged bankruptcy as when “a firm . . . negotiate[s] a reorganization plan with its creditors, and possibly solicit[s] acceptances of the plan, prior to filing for bankruptcy”).

[268]. Id. at 5–7.

[269]. See Lemma W. Senbet & James K. Seward, Financial Distress, Bankruptcy and Reorganization, in 9 Handbooks in Operations Research and Management Science: Finance 921, 951 (R.A. Jarrow et al. eds., 1995) (“[A] pre-packaged bankruptcy effectively circumvents the holdout problem by allowing the court to force dissenting creditors to accept the proposed reorganization plan.”).

[270]. Id.

Divergence and Convergence at the Intersection of Property and Contract – Article by Giuseppe Dari-Mattiacci & Carmine Guerriero

May 2019October 2019Southern California Law Review Admin

From Volume 92, Number 4 (May 2019)
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Divergence and Convergence at the Intersection of Property and Contract

Giuseppe Dari-Mattiacci [*] & Carmine Guerriero [†]

In this Article, we study rules that solve the conflict between the original owner and an innocent buyer of a stolen or embezzled good. These rules balance the protection of the original owner’s property and the buyer’s reliance on contractual exchange, thereby addressing a fundamental legal and economic trade-off. Our analysis is based on a unique, hand-collected dataset on the rules in force in 126 countries. Using this data, we document and explain two conflicting trends. There is a large amount of first-order divergence: both rules that apply to stolen goods and those that apply to embezzled goods vary widely across countries. Yet, there is also remarkable second-order convergence: virtually all legal systems protect the innocent buyer more strongly if the good was embezzled (rather than stolen) and if she purchased it in an open market, at an auction, or from a professional seller (as opposed to a private sale). We show that, while divergence is attributable to varying cultural values, convergence can be rationalized using a classic functional approach: these rules harmonize the owner’s incentives to protect property and the buyer’s incentives to inquire about title.

Introduction

Most legal systems around the world simultaneously advance two fundamental goals: the protection of property and the reliability of contractual exchange.[1] When stolen or embezzled personal property is sold to an innocent buyer, however, one of them needs to be prioritized over the other. This problem, which we call the “property-contract balance,”[2] arises because the thief or the embezzler commonly cannot be found or is insolvent. Therefore, we face the dilemma of either returning the property to the original owner—thereby frustrating the buyer’s contractual expectations—or upholding the transfer—thereby undermining the security of ownership.[3]

The rules addressing this issue—that is, good-faith purchase (“GFP”) rules—are as old as law itself. They can be found in the code of Hammurabi, the Talmud, Greek law, and Roman law, and Hindustani law, and they epitomize the pervasive phenomenon of transfers through (possibly unfaithful) intermediaries such as brokers, gallerists, middlemen, agents, and Internet platforms. Unauthorized agency, forged financial instruments, and double sales of personal or real property all raise analogous, GFP-like problems.[4]

The perplexing normative question of how such cases should be adjudicated is the object of an important and vast scholarship.[5] In this Article, we are concerned with the positive question of how such cases are adjudicated in different countries around the world, and if trends emerge, how such trends can be rationalized. In the analysis, we employ a unique dataset on the GFP rules in force in 126 countries around the world.[6]

To start with, we show that there is a large amount of first-order divergence across legal systems and quantify these differences using various indicators. GFP rules vary widely across countries, both for stolen and embezzled goods. This finding puts to rest a lingering debate in the literature, which has been traditionally divided in two camps: those who argue that GFP rules—and more generally private law provisions—vary,[7] as we show, and those who believe that they are rather uniform if one considers how such rules are applied in practice [8] (we account for this in our study).

Yet, we also show that there is remarkable second-order convergence—thereby vindicating both camps’ contentions—on how the protection of owners and buyers varies as a function of the mode of expropriation (theft versus embezzlement) and the context of the transfer (commercial versus private): virtually all legal systems in our dataset afford more protection to the innocent buyer if the good was embezzled rather than stolen, or if the purchase occurred in a commercial setting (we distinguish among public markets, auctions, and professional sellers, both for stolen and for embezzled goods) as opposed to a private sale. A fitting illustration is provided by the theft rule [9] versus the entrustment doctrine [10] in U.S. law: the owner prevails against a good-faith buyer of a stolen good, while the buyer prevails if the good was embezzled and she purchased it from a professional seller.

What explains these trends and how can they be reconciled? We use a combination of empirical analysis—which yields useful insights only if there is variation in the underlying data—and theoretical rationalization. We first address the question of divergence. In a previous study,[11] we developed a metric for cultural differences across countries—somewhat arbitrarily called self-reliance—capturing two distinct and important features of a country’s cultural endowment: respect for others and regard for hierarchy.[12] We show that a country’s degree of self-reliance accounts for divergence in GFP rules better than other measurable cross-country differences, including: random “disagreements,” the legal origins of a country’s current legal system, differences in political systems, and differences in religious beliefs.[13]

Our previous study dealt with stolen goods, but here, we exploit for the first time the other half of the data: embezzled goods.[14] Both analyses yield the same result: specific cultural traits are the root of comparative variation in private law rules and possibly beyond. In particular, we find that high levels of respect for others and low levels of regard for hierarchy—corresponding to a high degree of self-reliance—are associated with stronger owner protections. We demonstrate this contention using direct survey data on cultural traits and then repeat the analysis using the features of a country’s language as instrumental variables that embed cultural traits.[15] The survey data is contemporaneous to law and hence one cannot be sure there is a causal relationship rather than a simple correlation. Language, instead, does not often vary as a result of legal reforms and can be used as a stable indicator of hard-wired cultural traits.[16] To explore a possibly interesting avenue for future research, we also repeated our tests using world-wide data provided in the recent article, The Moral Machine Experiment [17] and spotted some interesting, though not very robust,[18] correlations between law and morality. More specifically, value systems that put more weight on an individual’s status and seniority are associated with stronger owner protection.

While our analysis yields insights into the causes of divergence, it also raises the question of how to rationalize (1) the relationship between legal divergence and cultural variation and (2) legal convergence. The literature has produced two main theoretical perspectives on the GFP problem. The ex anteincentives approach emphasizes that the level of protection that the law affords the original owner versus the buyer has an effect on the parties’ incentives to reduce the likelihood of potential conflicts. Namely, it dampens the owner’s incentives to protect her property and reinforces the buyer’s incentives to inquire about title.[19] Conversely, the ex postvalue approach suggests that, since something has already gone wrong, the contested good should simply be assigned to the party that surely, or absent reliable information on private valuations, values the good the most.[20]

Our analysis vindicates—again—both sides of the debate. We argue that the value approach provides a useful theoretical framework to understand divergence. The intuition is that while it is in principle more likely that the buyer attaches more value to the contested good—because high-value buyers self-select into the market—the importance of ex post reallocations is affected by the prevalence of theft—which in turn depends on the level of respect for others—and the efficiency of the enforcement system—which is a function of the level of regard for hierarchy.

In turn, we explain that the incentive approach sheds light on convergence. In a nutshell, stronger buyer protection emerges in contexts where the buyer has comparatively little control over the situation, and vice versa. In embezzlement cases, the owner can easily reduce the likelihood of expropriation by selecting a more trustworthy agent, which is not the case with theft cases. Similarly, in commercial transactions, there is a legitimate expectation that title has already been scrutinized, and hence, there is little the buyer can add.[21] In contrast, in private sales, the buyer’s effort pays off.[22]

We proceed as follows. In Part I we lay out the theoretical foundations of our approach, describe the data, and document convergence and divergence in GFP rules for stolen and embezzled goods. In Part II, we focus on divergence, show empirically that it is the product of cultural differences (in the degree of self-reliance), and compare our explanation with extant theories of comparative variation. In Part III, we address the issue of convergence and propose that, while the ex postvalue approach elucidates divergence, the ex anteincentives approach best accounts for convergence. The Appendix contains details of the analysis and of the data collection process, additional figures and regression tables.

I. First-order divergence and second-order convergence

We focus on the regulation of the GFP for value without notice of personal property in the case of theft—in which the original owner was dispossessed by a thief—and embezzlement—in which the good was originally entrusted by the original owner to an (unfaithful) embezzler. Scholarship has traditionally been divided on the issue of divergence versus convergence in GFP rules.[23] Traditional comparative analyses were based on only a handful of countries, often covered only blackletter law, and did not generally offer a way to compare the rules in force in different countries in an unambiguous and measurable way.[24]

To overcome these challenges, we worked with 149 teams of property experts in 125 countries,[25] who generously provided their time and effort to this project. Their names and the list of countries covered in this study can be found in the Appendix. These experts are either law professors at leading universities in their respective countries or practicing lawyers associated with internationally renowned law firms, most of which are part of the Lex Mundi network. We collected the data by means of a questionnaire in which we asked the question, “[a]t what conditions does a good faith buyer acquire ownership of a stolen or embezzled good?” and investigated a number of complementary and boundary issues.[26]

We inquired about the specific rules that apply to GFP, the definition of good faith, whether good faith is presumed, whether compensation is due to the dispossessed good-faith buyer in case the owner successfully reclaims the good,[27] the general background rules of adverse possession, transfer of property and statutes of limitations, and which goods are excepted (such as cultural heritage) or registered (such as automobiles) and hence subject to a different set of rules. The data covers the period 1981–2011; there was no relevant reform over this period.[28] Importantly, experts were instructed to report the black-letter rules and how they are applied in practice by courts.

In order to obtain a comparable measure of the rules of interest in each jurisdiction, from the experts’ answers we distilled four variables indicating the number of years after which the good-faith buyer acquires title on the good in each of four situations: private sale, public market, auction, and professional seller. We repeated the same exercise twice: for stolen goods and for embezzled goods. (We focused on cases in which the good is immediately resold after theft or embezzlement.)[29] These variables provide a quantitative measure of the protection of the original owner versus the good-faith buyer in each case: the greater the number of years, the stronger the protection of the original owner, and conversely, the weaker the protection of the good-faith buyer.[30]

Table 1 provides an example of the most relevant of the variables in our dataset for four countries as compared to the United States, and of the extent of variation. Starting from the top row, Denmark provides the strongest degree of owner protection in the case of stolen goods purchased in a private sale. In this case the buyer never acquires title, hence the owner is fully protected. (The “theft rule” in the United States provides the same degree of protection.)[31] At the other end of the spectrum, Italy fully protects the buyer, who acquires title immediately. Turkey and France afford the owner an intermediate level of protection, recognizing the buyer’s title after five and three years, respectively. None of these four countries require the owner to pay compensation to the buyer when the owner reclaims a good that the buyer purchased privately (second row).

The third and fourth rows concern commercial transactions, in which the buyer purchased the good in a public market, at an auction, or from a professional seller.[32] While the main index of owner protection is the same as in private sales, Turkey and France require the owner to pay a compensatory sum to the buyer equal to the market price and the purchase price, respectively, conditional on the owner satisfying the time limitation.

Moving down the table, while France and Italy have uniform rules for stolen and embezzled goods, both Denmark and Turkey provide more protection to the buyer when the good was embezzled rather than stolen. The difference is particularly stark in Denmark, where owners are provided with full protection in the case of theft and buyers are provided with full protection in the case of embezzlement. (The buyer is fully protected in the United States under the entrustment doctrine if the embezzled good was purchased from a professional seller.)[33]

To illustrate one of the metrics we use, in Figure 1 we provide the same information as in the first row of Table 1 for all the countries in our dataset.[34] Each dot in the graph represents a different country. The position of the dot in the graph indicates the degree of owner protection for private sale; the degree of owner protection for embezzled goods is indicated on the horizontal axis and the degree of owner protection for stolen goods is indicated on the vertical axis.

The countries that can be found along the diagonal afford the same degree of protection for stolen and embezzled goods (like Italy and France). Countries above the diagonal afford more protection to the owner if the good was stolen as opposed to embezzled (like Denmark and Turkey) and, vice versa, countries below the diagonal afford less protection to the owner if the good was stolen as opposed to embezzled.

The figure shows a large degree of first-order divergence in GFP rules. Countries are widely spread out both along the vertical axis—implying variation in the GFP rules concerning theft—and along the horizontal axis—which refers to embezzlement. Next to the two polar cases (full owner protection and full buyer protection), many countries offer several different intermediate degrees of protection to the owner, with a particularly relevant amount of variation in the range from zero to ten years.

The figure also shows the extent of second-order convergence, which can be appreciated by comparing the rules for stolen goods with those for embezzled goods. With only a couple of exceptions, the vast majority of the countries in our dataset lie above the diagonal; that is, almost all countries afford more protection to the original owner when the good was stolen rather than embezzled.

Analogous results are obtained when one considers the case of theft versus embezzlement in commercial transactions in Figure 2,[35] and the case of private sales versus commercial transactions for both theft and embezzlement in Figure 3.

Table 2 shows the prevalence of buyer-compensation provisions. These provisions surface more often across commercial settings as compared to private transactions, which is consistent with a greater degree of buyer protection in commercial transactions. Likewise, with private transactions, buyer-compensation provisions are more common in cases of embezzlement as compared to theft. This is again in line with the fact that embezzlement is associated with more buyer protection. However, in commercial transactions the result is inverted: buyer-compensation provisions are more common with theft. Although apparently puzzling, this result can be rationalized by noting that, in all cases, the removal of the compensation requirement is accompanied by a shorter term of years. This suggests a substitution effect: the reason for the lower prevalence of compensation rules is the fact that the buyer effectively received more protection. In the following sections, we delve into the causes of divergence and convergence.

II. Empirical analysis

A. Theories of Comparative Variation and Their Empirical Implications

There are four main competing explanations for comparative variation that—given currently available data—lend themselves to empirical investigation. We introduce them in the following sections and emphasize their main empirical implications.

1. Functional Equivalence

The functional-equivalence theory [36] holds that different legal systems most often implement the same solutions when addressing similar problems, owing to an underlying commonality of aims. This implies that, as emphasized by Professor Saul Levmore,[37] when differences in the laws of different countries are detected, they must be illusory (so that different rules actually reach the same outcome), accidental (rules differ for some random historical accident), or innocuous divergences of opinions (in cases when the optimal solution is unclear).

We can exclude the instances when differences in GFP rules are illusory. We asked country experts in our pool to report on how the black-letter law is applied in practice and to focus on the outcome of potential lawsuits. Differences remain and are substantial. If these differences are due to divergences in the way equally reasonable persons could assess the same issue, then they should not exhibit any particular pattern. If we detect a pattern in the data, we can then conclude that the functional-equivalence theory cannot explain divergence (while, as we will see in Part III, it may successfully explain convergence). Differences due to historical accidents may instead follow a pattern due, for instance, to colonization or transplantation dynamics. We discuss this issue in Section II.A.3.

2. Culture

Countries differ sharply in terms of dominant cultural values. In turn, cultural differences may result in differences in the law.[38] Culture can be “measured” in various ways. Direct measurements are provided by questionnaires administered through world-wide surveys.[39] The problem with direct measurements of cultural differences is that they are contemporaneous to law and hence it is hard to determine whether the relationship is causal. Therefore, to inquire about the cause of comparative variation, one needs to look deeper and identify cultural traits in a way that is unlikely to be the product of private law rules or some hidden common cause.

Language provides a relatively stable measure of deep cultural traits that—controlling for colonization, which codetermined law and language in many former colonies—is unlikely to be affected by private law. More specifically, pronoun usage embeds the way in which native speakers of a certain language relate to each other.[40] On the one hand, some languages allow the speaker to drop the first-person pronoun. This rule de-emphasizes the individual in a conversation and is empirically associated with lower levels of trust and respect for others.[41] On the other hand, some languages require the speaker to choose between the formal and the informal version of the second-person pronoun. This rule is empirically associated with higher levels of regard for hierarchy.[42] Our self-reliance indicator captures both dimensions.[43]

3. Legal Origins

Differences among legal systems can be traced back to a process of transplantation from one country to another.[44] The legal-families theory in comparative law [45] and the legal-origins theory in comparative economics [46] emphasize a particularly pervasive channel of transplantation: colonization. Empirically, this approach implies that divergence should be explained by common law rather than civil law origins; common law is associated a higher degree of private ordering in society, which in turn stresses owner protection.[47]

Instead of relying simply on the identity of the colonizer in a distant past, we empirically identify a country’s legal tradition based on its current characteristics along five dimensions: the precedential value of appellate decisions, the possibility to appeal on questions of facts, the role of equity, the adversarial character of procedure, and the scope of oral evidence.[48] This classification provides a continuous measure of proximity to a pure common law system, which in turn can be tested against self-reliance as a possible explanation for divergence.

4. Political Economics

Politics may play an important role in determining a country’s private law institutions.[49] In our context, the protection afforded to original owners versus good-faith buyers could be a function of the balance of power between an entrenched, concentrated elite, focused on protecting static ownership, and the rest of society. As a result, we should expect less democratic systems and systems based on majoritarian rather than proportional representation to reflect the preferences of the elite [50] and tend towards higher levels of owner protection.[51]

5. Religious Beliefs

Culture is heavily influenced by religious beliefs. Max Weber pointed out the effect of Protestantism on capitalist attitudes. He explained that, contrary to Catholics, Protestants saw worldly success as a sign of salvation and submitted to an ethics that discouraged expenditures to the benefit of re-investment.[52] A recent study has empirically documented the association of religion with an attitude towards the protection of capital. In particular, it found higher levels of creditor protection to be associated with Protestantism.[53] Analogizing to the GFP problem, we should expect Protestantism to be associated with higher levels of owner protection.[54]

B. Testing the Explanatory Power of Alternative Theories

All of the theories of comparative variation illustrated in the previous Section are compatible with a certain degree of divergence in GFP rules but each yields different predictions as to the pattern of such divergence. While the functional-equivalence theory implies that divergence should manifest itself as random noise, all other theories, including ours, predict that divergence should follow a certain predictable pattern in response to changes in the country characteristics emphasized by the theory under examination.

These theories taken together predict that owner protection should be greater in countries displaying a stronger culture of self-reliance, a legal system nearer to a perfect common law tradition, weaker constraints on the executive, a majoritarian rather than proportional electoral system, and a larger share of Protestants in the population. If any of these variables can be shown to explain a country’s GFP rules, then we can reject the functional-equivalence hypothesis, which implies that none of them should be statistically significant.

To compare the explanatory power of these theories we ran a regression. Figure 4 visualizes the main result of the analysis, depicting the effect of self-reliance on owner protection after controlling for the determinants of comparative variation suggested by the competing theories.[55] The degree of a country’s self-reliance is measured on the horizontal axis, while the relevant owner protection indicator is measured on the vertical axis. A positively-sloped regression line indicates a positive effect of self-reliance on owner protection, and a steeper slope indicates a bigger effect. (Vice versa, a negatively-sloped line reveals a negative effect.)

Self-reliance has a positive, large, and statistically significant (at the 1% level) effect on owner protection in the case of embezzled goods. This result holds for all market configurations and allows us to reject the hypothesis that divergence is random.[56]

Similarly, Figure 4 reports the effect of a larger share of Protestants on owner protection, after controlling for all the determinants of comparative variation suggested by the competing theories (including self-reliance). In this case, the effect is smaller and negative, suggesting that a larger share of Protestants is associated with weaker owner protection. This result is inconsistent with the Weberian view that we mentioned before. Moreover, as documented in the Appendix, the coefficients attached to Protestantism are statistically significant at a 5% level only in the two upper graphs and in the bottom-left graph in Figure 5.

Similar tests on the effects of constraints on the executive, a majoritarian rather than proportional electoral system, and the common law tradition return coefficients that are statistically undistinguishable from zero. These results demonstrate that divergence in GFP rules for embezzled goods is best explained by cultural differences rather than randomness, a common rather than civil law origin, political economics, or religious beliefs. These results are in line with our previous study in which we focused on stolen goods and found the same pattern.[57] (We also ran a series of regressions—including widely used controls, related to income, natural resources, genetic variation and conflicts—and report the results in the Appendix.)

Since our analysis stresses the role of cultural and religious beliefs, moral beliefs may also play a role. We thus ran an additional regression analysis on data from the recent article, The Moral Machine Experiment,[58] which classified countries based on moral beliefs, as exemplified in a modern version of the trolley problem: an autonomous car is about to crash on either one of two (groups of) people. Respondents were essentially asked who should die and who should be spared. We found an interesting positive correlation between the propensity to spare higher-status and older individuals in a country and owner protection in GFP rules in that country (Figure 6). While these results may make intuitive sense—given that the protection of property generally favors individuals belonging to the elite as opposed to the masses and older as opposed to younger individuals—their statistical significance vanishes when introducing relevant controls. Future studies may delve deeper into the empirical relation between law and morality.

III. Convergence and divergence in theory

Scholarship on the topic has put forward two alternative frameworks to rationalize the choice between owner protection and buyer protection in GFP. One camp [59] gives primacy to ex ante incentives to reduce the risk of unwanted transfers. In particular, the comparison is between the owner’s incentives to protect her property and the buyer’s incentives to inquire about title. The intuition is that protecting buyers provides owners with incentives to protect their property in order to reduce the likelihood of theft or embezzlement; conversely, protecting owners provides buyers with incentives to inquire about title in order to reduce the risk of paying for goods they will lose at a later time.

An alternative approach is to focus on the ex post allocation of the good to the (most likely) higher-value user between the buyer and the owner.[60] A useful heuristic is the fact that, typically, voluntary market transactions occur between a relatively high-value buyer and a relatively low-value owner. If the opposite were true, the transaction would not take place. Therefore, the potential buyers that populate a typical market are generally relatively high-value individuals.[61] Intermediaries tend to resell in those markets because the higher the buyer valuation, the greater their gains. In turn, dispossessed owners are not necessarily high-value individuals: some of them may never have sold the good while others might have in the future. Therefore, on average, the ex post conflict between the good-faith buyer and the original owner is most likely to involve a high-value buyer and an average-value owner. This in turn suggests that, in principle, ex post value is maximized in expectation if goods are assigned to the good-faith buyer.[62]

A. The Ex PostValue Theory and First-Order Divergence

In previous studies, we have shown that country-specific characteristics affect the likelihood of ex post misallocation and, in turn, the relative desirability of buyer protection.[63] Respect for others and regard for hierarchy are relevant for the regulation of GFP transactions. Countries with a higher level of enforcement benefit more from buyer protection and hence are more likely to adopt it. The intuition is that high levels of enforcement result in goods being returned to their original owners more often under owner protection, which makes buyer protection preferable. Conversely, countries with a higher degree of trust and respect for others benefit less from buyer protection because of a lower incidence of unwanted transfers. In this way, country characteristics can be used as an explanation for the GFP rules in force.[64]

In terms of self-reliance, this analysis suggests that a higher degree of self-reliance—corresponding to higher levels of trust and respect for others and lower regard for hierarchy and enforcement—should be empirically associated with a higher level of owner protection.[65]

B. The Ex AnteIncentives Theory and Second-Order Convergence

The ex anteincentives theories of GFP rules have traditionally been widely employed to construct normative arguments as to which rule is preferable on a global scale and have influenced scholarship more profoundly than the ex postvalue approach.[66] In turn, ex anteincentives theories are premised on the idea that improved ex post protections dilute incentives ex ante. More specifically, increasing owner protection improves the buyer’s incentives to inquire about title but reduces the owner’s incentives to “self-protect” her property.

However, this premise can be called into question in a dynamic market where prices adjust to expectations. If one allows the price that a buyer is willing to pay for a possibly stolen or embezzled good to reflect the risk that she will lose the good later on, the intuition illustrated above becomes far from obvious. While the literature has focused on the fact that legal protection affects the marginal benefits of self-protection, we argue that it also affects its marginal costs, making the result possibly indeterminate.[67]

In particular, a higher level of owner protection has a direct effect on the incentives for the owner to protect her property because it increases the probability that a stolen or embezzled good will be returned and hence lowers the benefits from efforts to protect property. However, it also has an indirect effect. If the owner is protected, the market value of goods of dubious origin decreases (as buyers may be wary of losing the good later on), which reduces the expected gains of thieves and embezzlers, making them less aggressive at the margin. This in turn makes it cheaper for the owner to protect her property, thus creating an incentive towards more self-protection for the owner. Similarly, on the buyer’s side, owner protection increases the benefits of inquiring about title but also makes goods cheaper and, hence, lowers the cost of not doing so.

Overall, the parties’ incentives may be positively or negatively affected by increased legal protection, weakening the power of the incentive-theory to explain the design of GFP rules for theft and embezzlement and, in turn, first-order divergence in GFP rules. We argue, however, that incentives can contribute to understanding second-order convergence in GFP rules.

We start with comparing theft with embezzlement. The core of the argument is that for any given marginal benefit of self-protection for the owner, the marginal cost of self-protection for the owner is lower in the case of embezzlement than in the case of theft. The reason is intuitive: while thieves are strangers, an owner chooses whom to trust. In embezzlement cases, there are many ways the owner can protect her property, because most commonly she is in a (contractual) relationship with the potential embezzler and, hence, can both screen her counterparty ex ante and control her ex post. Therefore, comparatively, the owner has lower costs of care in embezzlement cases, while the buyer’s incentives to inquire about title remain unaffected.

To stress our point, whatever effect owner protection has on the owner’s incentives to self-protect—and we have argued above that this effect is indeterminate—this effect is different in theft as opposed to embezzlement cases. In particular, the effect is comparatively more likely to go towards increased self-protection in the case of embezzlement. Convergence emerges as a second-order effect, when comparing the relative (a priori indeterminate) effect of legal protection in different setups.[68]

A similar trend can be detected by comparing the rules that apply to private transactions with those pertaining to commercial transactions made in a market, at an auction, or through a professional seller. In the latter set of cases, buyer protection is systematically stronger. This is because the original owner’s ability to protect her property remains unchanged while the buyer’s ability to inquire about title may be far greater in private transactions as compared to commercial settings. In this case, information about title, whenever available, should have already been acquired by the intermediary so there is little scope for any additional buyer’s inquiry. It may therefore be preferable to attempt to incentivize the owner.

Conclusion

In this article, we have documented first-order divergence and second-order convergence in GFP rules around the world. Our empirical analysis shows that the most likely cause of divergence is cultural differences across countries, while a likely push towards convergence remains the functional uniformity of these rules. Of the two main theoretical approaches to GFP rules, we have shown that the ex postvalue approach is well suited to rationalize divergence, while the ex anteincentive approach explains convergence. While navigating the different camps that have polarized the debate on the normative and positive analysis of GFP rules, at the various junctures of our analysis we end up vindicating both sides of the debate and emphasize that different approaches contribute different layers of the theory we advance. Our conclusions do not imply that other factors are not at play. We have offered an exploratory analysis of the effects of morality, and future research may offer a more nuanced view.

Appendix

A. Additional Figures

B. Econometric Analysis

C. List of Country Experts

Besa Tauzi, Boga & Associates (Albania); António Vicente Marques and Cláudia Veloso, AVM-Advogados (Angola); Martín Bensadon, Marval O’Farrell & Marval (Argentina); Armen Melkumyan, Prudence CJSC (Armenia); Michael Back, Freehills (Australia); Wolfgang Faber, University of Salzburg (Austria); Rashid Aliyev, Baker & McKenzie, Baku, CIS Limited (Azerbaijan); Saifuddin Mahmood, Hassan Radhi & Associates (Bahrain); Al Amin Rahman and Sabrina Zarin, FM Associates (Bangladesh); Amina Khatoon, Doulah & Doulah (Bangladesh); Aliaksandr Danilevich, Belarusian State University (Belarus); Sergei Makarchuk, Law Firm CHSH Cerha Hempel Spiegelfield Hlawati, Minsk Office (Belarus); Caroline Cauffman, Maastricht University and University of Antwerp (Belgium); Tania Moody, Barrow & Williams (Belize); Mario Kempff and Patricio Rojas, CR & F Rojas Abogados (Bolivia); Meliha Povlakić and Darja Softić Kadenić, University of Sarajevo (Bosnia and Herzegovina); Rafael Gagliardi and Newton Marzagão, Demarest & Almeida Advogados (Brazil); Dimitar Stoimenov, Peterka & Partners Law Firm (Bulgaria); Camille Razalison and Adrien Rangira, John W Ffooks & Co (Burkina Faso and Ivory Coast); Jehny Ramiandrisoa and Adrien Rangira, John W Ffooks & Co (Burundi); Nimrod E Mkono, Gilbert LP Nyatanyi, Lambert Nigarura, and René-Claude Madebari, Mkono & Co. Burundi (Burundi); Eddy Ratianarivo and Adrien Rangira, John W Ffooks & Co (Cameroon); Matías Ignacio De Marchena Vicuña, Claro y Cía (Chile); Elliott Youchun Chen, Beijing Jun Ze Jun Law Offices, Shenzhen (China); Jie Chen, Jun He Law Offices (China); Ernesto Rengifo García, Universidad Externado de Colombia and Garrido & Rengifo Abogados (Colombia); Adrián Álvarez Orellana, Consortium Laclé& Gutiérrez (Costa Rica); Eduardo Calderon, Adriana Castro and Manuel Santos, BLP Abogados (Costa Rica); Hano Ernst, University of Zagreb (Croatia); Tatjana Josipovic, University of Zagreb (Croatia); Stéphanie Laulhé Shaelou, University of Central Lancashire (Cyprus); Alexandr Thöndel, Charles University (Czech Republic); Michaela Zuklínová, Charles University (Czech Republic); Arnauld Kayembe Tabu, University of Kinshasa and Kayembe Tabu Law Office Kinshasa (DRC) (Democratic Republic of Congo); Bukayafwa Deo Gratias, MBM-Conseil SCA (Democratic Republic of Congo); Francois Butedi, SADC-CNGO (Democratic Republic of Congo); Phebe Mavungu Clément, University of the Witwatersrand (Democratic Republic of Congo); Ole Borch, Bech-Bruun (Denmark); Tobias Vieth, Danders & More (Denmark); Laura Bobea Escoto, Medina & Rizek, Abogados (Dominican Republic); Pablo Ortiz-Garcia and Luis Marin-Tobar, Perez Bustamante & Ponce (Ecuador); Roque Albuja, Quevedo & Ponce (Ecuador); Ahmed El-Gammal and Nihal Madkour, Shalakany Law Office (Egypt); Monica Machuca, Aczalaw (El Salvador); Kai Kullerkupp, University of Tartu (Estonia); Liina Linsi and Monika Tamm, Lawin (Estonia); Molla Mengistu, School of Law, Addis Ababa University (Ethiopia); Muradu A Srur, Addis Ababa University, School of Law (Ethiopia); Jarmo Tuomisto, University of Turku (Finland); Sophie Tavergnier and Philippe Xavier-Bender, Gide Loyrette Nouel (France); David Kakabadze, Georgian Legal Partnership (Georgia); Vanessa Pickenpack and Klaus Guenther, Oppenhoff & Partners (Germany); Ellen Bannerman, Bruce-Lyle, Bannerman & Associates (Ghana); Norma Dawson, Queen’s University Belfast (Great Britain and Northern Ireland); Ben McFarlane, University College London (Great Britain, Hong Kong and Malaysia); Alexandra Economou, Drakopoulos Law Firm (Greece); Cristóbal Fernández and María de la Concepción Villeda, Mayora & Mayora, S.C. (Guatemala); Juan José Alcerro Milla, Carolina Aguirre Larios and Melissa Amaya Pastrana, Aguilar Castillo Love (Honduras); Gabor Fejes, Oppenheim and Partners Freshfields Bruckhaus Deringer (Hungary); Ciccu Mukhopadhaya and Surjendu Das, Amarchand Mangaldas and Suresh A. Shroff and Company, New Delhi (India); Nafis Adwani, Ali Budiardjo, Nugroho, Reksodiputro (Indonesia); Behrooz Akhlaghi, Shahrzad Majdameli, Encyeh Seyed Sadr, Camellia Abdolsamad, Ali Shahabi, Seyed Iman Mohamadian, Dr. Behrooz Akhlaghi & Associates (Iran); Caterina Gardiner, National University of Ireland, Galway (Ireland); Amnon Lehavi, Radzyner School of Law, Interdisciplinary Center (IDC) Herzliya (Israel); Alessio Greco, Istituto Mediterraneo per i Trapianti e Terapie ad Alta Specializzazione (Italy); Courtney B. Smith, Foga Daley, Attorneys at law (Jamaica); Hiroo Atsumi, Atsumi & Sakai (Japan); Bassam Abu-Rumman, Ali Sharif Zubi Advocates & Legal Consultants (Jordan); Dariya Saginova, Grata Law Firm (Kazakhstan); Saule Massalina, Salans law firm (Kazakhstan); Valikhan Shaikenov, Aequitas Law Firm (Kazakhstan); Peter Gachuhi, Kaplan and Stratton Advocates (Kenya); Atdhe Dika and Vegim Kraja, Kalo & Associates Law Firm (Kosovo); Al Noor, Al -Twaijri and Partners Law Firm (Kuwait); Babitskaya Elena Viktorovna, Veritas Law Agency Limited Liability Company (Kyrgyz Republic); Kanat Seidaliev, Grata Law Firm (Kyrgyz Republic); Nurlan Alymbaev, Law Firm Alymbaev (Kyrgyz Republic); Julija Kolomijceva, bnt Klauberg Krauklis Zab (Latvia); Tiisetso Sello-Mafatle, Sello-Mafatle Attorneys (Lesotho); Jaunius Gumbis, Lawin Lideika, Petrauskas, Valiūnas and partners (Lithuania); Simas Gudynas, Lawin Lideika, Petrauskas, Valiūnas and partners (Lithuania); Alex Schmitt, Bonn Schmitt Steichen (Luxembourg); Nenad Gavrilovic, Faculty of Law ‘Iustinianus Primus’, Skopje, University ‘Ss Cyril and Methodius’ (Macedonia); Fatima Diarra, Cabinet d’Avocats Sim (Mali); Jotham Scerri-Diacono, Ganado Advocates (Malta); Vincent Chong Leung, Juristconsult Chambers, cabinet d’avocats (Mauritius); Héctor Calatayud Izquierdo, Basham, Ringe y Correa (Mexico); Octavian Cazac and Vladimir Palamarciuc, Turcan Cazac Law Firm (Moldova); Nergui Enkhtsetseg, Anand & Batzaya Advocates (Mongolia); Neda Ivovic, University of Donja Gorica (Montenegro); Zohra Hasnaoui and Ahmad Hussein, Hasnaoui Law Firm AGIP (Abu-Ghazaleh Intellectual Property – Morocco) (Morocco); Carlos de Sousa E Brito, Carlos de Sousa E Brito & Associados (Mozambique); Win Win Aye and Khin Wint Maw, Kelvin Chia Yangon Limited (Myanmar); Willem Bodenstein and Mike Bottger, Lorentz Angula Incorporated (Namibia); Arthur Salomons, University of Amsterdam (Netherlands); Roger Tennant Fenton, Southern Cross Chambers (New Zealand); Minerva Bellorin R., Diogenes E, Velasquez V, and Mazziel A Rivera Núñez, Aczalaw (Nicaragua); Lydia Rosoanirina and Adrien Rangira, John W Ffooks & Co (Niger); Joseph Eimunjeze, Udo Udoma & Belo-Osagie (Nigeria); Jan-Ove Færstad, University of Bergen (Norway); Alastair R. Neale and Ruqaya Al Khanbashi, Jihad Al Taie Law Office (Oman); Zaid Al Khattab, Talala Abu Ghazaleh & Co (Oman); Ahsan Zahir Rizvi, Rizvi, Isa, Afridi & Angell (Pakistan); Ivette E Martínez, Patton Moreno & Asvat (Panama); Ramon Varela, Morgan & Morgan (Panama); Esteban Burt, Peroni Sosa Tellechea Burt & Narvaja (Paraguay); Manuel Villa-García Noriega, Estudio Olaechea S Civil de RL (Perù); Eduardo de los Angeles, Romulo Mabanta Buenaventura Sayoc & de los Angeles (Philippines); Jerzy Andrzej Pisuliński and Michal Kucka, Jagiellonian University in Cracow (Poland); Margarida Costa Andrade, University of Coimbra (Portugal); Monica Jardim, University of Coimbra (Portugal); Thelma Rivera, Goldman, Antonetti & Córdova, PSC (Puerto Rico); Ejan Mackaay, Université de Montréal (Quebec, Canada); Cristina Bolea and Vlad Peligrad, Clifford Chance Badea SCA (Romania); Magdalena Raducanu, Salans Moore si Asociatii SCPA (Romania); Sergey Strembelev and Natalia Dialektova, Egorov Puginsky Afanasiev & Partners Law Offices (Russia); Vannissa Rakotonirina and Adrien Rangira, John W Ffooks & Co (Rwanda and Senegal); Stephen Matthews and Abdullah Al Saab, The Law Office of Mohanned S Al-Rasheed (Saudi Arabia); Andrew Steven, University of Edinburgh (Scotland, UK); Nataša Lalatović Đorđević, Moravčević Vojnović and partners in cooperation with Schoenherr (Serbia); Žarko S. Borovčanin, Jankovic, Popovic & Mitic od (Serbia); Oredola Martyn, Clas Legal (Sierra Leone); Yi-Ling Teo, Gateway Law Corporation (Singapore); Katarína Čechová, Čechová & Partners (Slovak Republic); Tomaz Kerestes, University of Maribor (Slovenia); Athol Gordon, Bowman Gilfillan Attorneys (South Africa); Chun-Wook Hyun, Kim & Chang (South Korea); Carlos Díez Soto, Technical University of Cartagena, and Isabel González Pacanowska, University of Murcia (Spain); John Wilson, John Wilson Partners, Attorneys at Law & Notaries Public (Sri Lanka); Martin Lilja, Salzburg University (Sweden); Bénédict Foëx, University of Geneva (Switzerland); Deema Abu Zulaikha, Tag-Legal Syria (Syria); Kamanga Wilbert Kapinga, CRB Africa Legal (Tanzania); Cynthia M Pornavalai, Tilleke & Gibbins (Thailand); Phisit Dejchaiyasak, Weerawong, Chinnavat and Peangpanor Limited (Thailand); Stephen A Singh, Johnson, Camacho and Singh (Trinidad and Tobago); Issam Mokni, Ferchiou & Associés (Tunisia); Yesim Atamer, Ece Bas, Başak Başoğlu, Meliha Sermin Paksoy, and Pinar Yazici, Istanbul Bilgi University (Turkey); Emmanuel Kasimbazi, Makerere University (Uganda); Oleg Boichuk, Magisters (Ukraine); Rami Abdellatif and Mohammed Kamran, Al Tamimi Advocates & Legal Consultants (United Arab Emirates); Steven Walt, University of Virginia School of Law (United States); Pedro J Montano, Universidad de la República and Scelza & Montano (Uruguay); Juan Enrique Aigster and José Alberto Ramírez, Hoet Pelaez Castillo & Duque Abogados (Venezuela); Dang The Duc and Tuong Tran, Indochine Council (Vietnam); Sydney Chisenga, Corpus Legal practitioners (Zambia); Peter Lloyd, Gill, Godlonton & Gerrans (Zimbabwe).

D. List of Countries and Country Codes

[*] *. Professor of law and professor of economics, University of Amsterdam; Joseph P. Cunningham Visiting Professor of Commercial and Insurance Law (Fall 2018), Columbia Law School; Visiting Professor of Law (Spring 2019), New York University School of Law.

[†] †. “Rita Levi-Montalcini” Associate Professor, Department of Economics, University of Bologna; e-mail: c.guerriero@unibo.it; homepage: https://sites.google.com/site/carmineguerrieroshome
page. The authors would like to thank Yun-chien Chang, Richard Epstein, Franco Ferrari, Saul Levmore, Ariel Porat, and Henry Smith for insightful comments. We are deeply grateful to Edmond Awad and his coauthors—Sohan Dsouza, Richard Kim, Jonathan Schulz, Joseph Henrich, Azim Shariff, Jean-François Bonnefon and Iyad Rahwan—for sharing with us the data from The Moral Machine Experiment. The authors would also like to thank Melissa Bales for excellent research and editorial assistance.

[1]. This notion is central to the large literature in law and economics that has originated from R. H. Coase, The Problem of Social Cost, 3 J.L. Econ. 1 (1960). Its importance, however, had long been recognized in legal scholarship, not only in the United States. E.g., Gaetano Petrelli, L’Autenticità Del Titolo Della Trascrizione Nell’Evoluzione Storica e Nel Diritto Comparato, 53 Rivista di Diritto Civile 585, 588 (2007); J.G. Sauveplanne, The Protection of the Bona Fide Purchaser of Corporeal Movables in Comparative Law, 29 Rabel J. Comp. Int. Priv. Law 651, 651 (1965). See generally René Demogue, Les Notions Fondamentales du Droit privé: Essai Critique Pour servir d’Introduction à l’ étude des Obligations (1911) (on the notion of static versus dynamic security); Victor Ehrenberg, Rechtssicherheit und Verkehrssicherheit: mit besonderer Rücksicht auf das Handelsregister (1904) (on the notion of certainty of rights versus certainty of transactions).

[2]. We introduced this notion in Giuseppe Dari-Mattiacci & Carmine Guerriero, Law and Culture: A Theory of Comparative Variation in Bona Fide Purchase Rules, 35 Oxford J. Legal Stud. 543 (2015) (dealing exclusively with stolen goods).

[3]. Ashton Hawkins et al., A Tale of Two Innocents: Creating an Equitable Balance Between the Rights of Former Owners and Good Faith Purchasers of Stolen Art, 64 Fordham L. Rev. 49, 49–50 (1995); Menachem Mautner, “The Ethernal Triangles of Law”: Toward a Theory of Priorities in Conflicts Involving Remote Parties, 90 Mich. L. Rev. 95, 95–96 (1991); see also Grant Gilmore, The Commercial Doctrine of Good Faith Purchase, 63 Yale L.J. 1057, 1057 (1954) (stressing that the historical emergence of the doctrine of good faith purchase served a commercial purpose: enabling contracting parties to rely on market transactions without costly inquiries about title); Boris Kozolchyk, Transfer of Personal Property by a Nonowner: Its Future in Light of Its Past, 61 Tul. L. Rev. 1453, 1454 (1987) (focusing on the rule’s function of enabling transfers through market intermediaries); Daniel E. Murray, Sale in Market Overt, 9 Int’l & Comp. L.Q. 24, 24–25 (1960) (arguing that the good faith purchase rules provide common sense solutions to a universal problem); Sauveplanne, supra note 1, at 651–52 (stressing the commercial logic behind good faith purchase rules). For a formal analysis, see Benito Arruñada et al., Property Rights in Sequential Exchange, 35 J.L. Econ. & Org. 127, 127–28 (2019).

[4]. See Benito Arruñada, Institutional Support of the Firm: A Theory of Business Registries, 2 J. Legal Analysis 525, 534–54 (2010); Kenneth Ayotte & Patrick Bolton, Optimal Property Rights in Financial Contracting, 24 Rev. Fin. Stud. 3401, 3402–04 (2011). This Article focuses on personal property; real property is subject to registration, which in turn has different effects under different national registration systems. For analysis on real property, see generally Carmine Guerriero, Endogenous Property Rights, 59 Int. Rev. L. & Econ. 313 (2016).

[5]. See, e.g., Alan Schwartz & Robert E. Scott, Rethinking the Laws of Good Faith Purchase, 111 Colum. L. Rev. 1332, 1333–38 (2011) (providing a recent scholarly contribution to this field that contains a review of the relevant literature).

[6]. The raw data and a detailed description can be found in Giuseppe Dari-Mattiacci & Carmine Guerriero, A Novel Dataset on Horizontal Property Rights in 126 Jurisdictions, 11 Data Brief 557, 559–60 (2017). We dropped Taiwan due to a coding error and hence reduced the sample size to 125 countries for the purposes of this analysis. This change does not affect any of our main results since our proxy for the quality of legal enforcement is not observable for this jurisdiction. We thank Yun-chien Chang for having drawn our attention on this issue.

[7]. See, e.g., Saul Levmore, Variety and Uniformity in the Treatment of the Good-Faith Purchaser, 16 J. Legal Stud. 43, 45 (1987); John Henry Merryman, The Good Faith Acquisition of Stolen Art, in Crime, Procedure and Evidence in a Comparative Context 275, 275–81 (John Jackson et al. eds., 2008); Patricia Youngblood Reyhan, A Chaotic Palette: Conflict of Laws in Litigation Between Original Owners and Good-Faith Purchasers of Stolen Art, 50 Duke L.J. 955, 1006 (2001).

[8]. E.g., William M. Landes & Richard A. Posner, The Economics of Legal Disputes Over the Ownership of Works of Art and Other Collectibles, in Economics of the Arts 177, 214–17 (Victor A. Ginsburgh & Pierre-Michel Menger eds., 1996). For a historical perspective, see also Murray, supra note 3, at 50–52 (discussing how multiple legal systems across space and time have been similar).

[9]. See Solomon R. Guggenheim Found. v. Lubell, 569 N.E.2d 426, 431 (N.Y. 1991).

[10]. See U.C.C. § 2-403(2)–(3) (Am. Law Inst. & Unif. Law Comm’n 2018). For a constitutional perspective on the theft rule versus the entrustment doctrine, see generally Elwood Earl Sanders, Jr., (Red) Elvis Has Left the Building: Did the UCC Legalize Theft? Constitutional Concerns Arising from the UCC Entrustment Clause, A Critical Analysis of Lindholm v. Brant, 13 Appalachian J.L. 21 (2013).

[11]. Dari-Mattiacci & Guerriero, supra note 2, at 550; see also Giuseppe Dari-Mattiacci, Carmine Guerriero & Zhenxing Huang, The Property–Contract Balance, 172 J. Institutional & Theoretical Econ. 40, 49, 60–61 (2016).

[12]. Self-reliance takes three possible values: high, if a country has high respect for others and low regard for hierarchy; low, if a country has low respect for others and high regard for hierarchy; and medium, in the residual cases (high or low levels of both respect for others and regard for hierarchy). Collapsing two cultural dimensions into a single variable has the advantage of allowing for direct visualizations of the results.

[13]. See infra Section II.A (providing details on these approaches and references).

[14]. Dari-Mattiacci & Guerriero, supra note 2, at 559–60.

[15]. See infra Section II.B.

[16]. See Chi-yue Chiu, Language and Culture, Online Readings Psychol. & Culture, Mar. 2011, at 1, 3–5 (providing a literature review on the effects of language on culture); Emiko S. Kashima & Yoshihisa Kashima, Culture and Language: The Case of Cultural Dimensions and Personal Pronoun Use, 29 J. Cross-Cultural Psychol. 461, 462 (1998) [hereinafter Kashima & Kashima, Culture and Language]; Emiko S. Kashima & Yoshihisa Kashima, Erratum to Kashima and Kashima (1998) and Reiteration, 38 J. Cross-Cultural Psychol. 396, 396 (2005); Sean Lee, Rethinking the Relationship Between Pronoun-Drop and Individualism with Bayesian Multilevel Models, 2 J. Language Evolution 188, 192 (2017) (arguing that the associations between language and culture found by Kashima and Kashima may be driven by Indo-European languages); Amnon Lehavi & Amir Licht, BITs and Pieces of Property, 36 Yale J. Int’l L. 115, 115–18 (2011) (first to use this approach in legal scholarship); Lewis Davis, An Extension of the Kashima and Kashima (1998) Linguistic Dataset 2–4 (May 12, 2012) (unpublished manuscript) (on file with authors).

[17]. See Edmond Awad et al., The Moral Machine Experiment, 563 Nature 59, 60–64 (2018).

[18]. See infra Section II.B (explaining these findings vanish when one adds relevant controls).

[19]. See Levmore, supra note 7, at 46; Anthony Ogus, What Legal Scholars Can Learn from Law and Economics, 79 Chicago-Kent L. Rev. 383, 394–95 (2004). For a formal mathematical approach to the problem, see generally Landes & Posner, supra note 8; Caspar Rose, The Transfer of Property Rights by Theft: An Economic Analysis, 30 Eur. J.L. Econ. 247 (2010); Schwartz & Scott, supra note 5; Omri Ben Shahar, Property Rights in Stolen Goods: An Economic Analysis (1997) (unpublished manuscript) (on file with authors).

[20]. Barak Medina, Augmenting the Value of Ownership by Protecting It Only Partially: The “Market-Overt” Rule Revisited, 19 J. L. Econ. & Org. 343, 368 (2003).

[21]. Several previous contributions have recognized the fact that the owner is in the best position to reduce the risk of embezzlement and that the buyer is justified in assuming the presence of good title in an open commercial setting. E.g., Benito Arruñada, Institutional Foundations of Impersonal Exchange 41 (2012); Arruñada, supra note 4, at 528; Randy E. Barnett, Squaring Undisclosed Agency Law with Contract Theory, 75 Calif. L. Rev. 1969, 1996–97 (1987); Karen Theresa Burke, International Transfers of Stolen Cultural Property: Should Thieves Continue to Benefit from Domestic Laws Favoring Bona Fide Purchasers?, 13 Loy. L.A. Int’l & Comp. L.J. 427, 444–46 (1990); Saul Levmore, Rethinking Comparative Law: Variety and Uniformity in Ancient and Modern Tort Law, 61 Tul. L. Rev. 235, 287 (1986); Levmore, supra note 7, at 59; Mautner, supra note 3, at 131; Medina, supra note 20, at 346; Harold R Weinberg, Sales Law, Economics, and the Negotiability of Goods, 9 J. Legal. Stud. 569, 590–91 (1980).

[22]. At a very general level, our analysis proposes a framework to rationalize divergence and convergence in private law rules, suggesting that divergence is driven by culture while convergence is driven by function—more precisely, the need to provide incentives for good behavior. For alternative frameworks used to addresss the same issue, see Yun-chien Chang & Henry E. Smith, Convergence and Divergence in Systems of Property Law: Theoretical and Empirical Analyses, 92 S. Cal. L. Rev. 785, 78696 (2019); Saul Levmore, Convergence and Then Downstream Divergence in Torts and Other Law, 92 S. Cal. L. Rev. 769, 78283 (2019); see also Yun-chien Chang, 214 Jurisdictions in the World Gets It Wrong: Fractional Ownership and Internal Auction in the Good-faith Purchase Problem 28–35 (2018) (unpublished manuscript) (on file with authors) (arguing that the market overt rule provides optimal incentives to owners, buyers, and intermediaries).

[23]. See supra notes 78 and accompanying text.

[24]. When we started collecting data for this project, the largest previous study on this matter only covered about thirty countries; for this information, see generally National Reports on the Transfer of Movables in Europe (Wolfgang Faber & Brigitta Lurger eds., 2011); Rules for the Transfer of Movables (Wolfgang Faber & Brigitta Lurger eds., 2008). Recent comparative law scholarship increasingly makes use of large datasets and a series of notable studies on this matter have been produced by Professor Yun-chien Chang, whose work is complementary with ours.

[25]. Note that in the data we differentiate among England, Wales, Northern Ireland, and Scotland.

[26]. The questionnaire was drafted by the two of us and Arthur Salomons and was sent to the country experts in English or French.

[27]. While a number of countries require the original owner to pay compensation to the good-faith buyer when the good is reclaimed, interestingly, no jurisdiction in our sample contained the opposite rule, which would require a prevailing good-faith buyer to pay compensation to the original owner in order to retain the good.

[28]. The data is freely available in Dari-Mattiacci & Guerriero, supra note 6, at 559–60. For more details and extensive summary statistics, see Dari-Mattiacci & Guerriero, supra note 2, at 55055.

[29]. We did so because statutes of limitations start running at different times in different jurisdictions. In this way, we made sure that our comparisons are not affected by this additional source of variation.

[30]. There are cases in which the buyer never acquires title (as reported in Table 1). We assigned to these cases the value of 30 years, which is the largest value short of “Never” in our data. We repeated the analysis with alternative proxies for “Never” and the results remain essentially the same.

[31]. E.g., Solomon R. Guggenheim Found. v. Lubell, 569 N.E.2d 426, 431 (N.Y. 1991).

[32]. Note that the dataset differentiates among these three cases while the table does not, because the four countries reported here apply uniform rules, in contrast with the United States. See id.

[33]. See U.C.C. § 2-403(2)–(3) (Am. Law Inst. & Unif. Law Comm’n 2018).

[34]. For the list of country and country codes, see infra Appendix.

[35]. Note that there is less variance in commercial transactions, as compared to private sales. This observation is consistent both with a static push towards more buyer protection in commercial settings, which mechanically reduces variation and with a dynamic tendency towards convergence due to higher stakes and more frequent interactions. See Richard A. Epstein, The Path to the T.J. Hooper: The Theory and History of Custom in the Law of Tort, 21 J. Legal Stud. 1, 1516 (1992).

[36]. Konrad Zweigert & Hein Kötz, Introduction to Comparative Law 33–47 (Tony Weir trans., Clarendon Press 3d rev. ed. 1998).

[37]. Levmore, supra note 7, at 65. For further discussion, see generally Levmore, supra note 22.

[38]. See Sjoerd Beugelsdijk & Robbert Maseland, Culture in Economics 313–18 (2011); Geert Hofstede, Cultures and Organizations 23–24 (1991); Deepak Lal, Unintended Consequences: The Impact of Factor Endowments, Culture, and Politics on Long-Run Economic Performance 62–65 (1998) (noting the effect of culture on predominantly-Islamic countries); Philippe Aghion et al., Regulation and Distrust, 125 Q.J. Econ. 1015, 1046–47 (2010); Thorsten Beck et al.,, Law, Endowments, and Finance, 70 J. Fin. Econ. 137, 151–53 (2003); Yuriy Gorodnichenko & Gerard Roland, Culture, Institutions and the Wealth of Nations, 99 Rev. Econ. Stat. 402, 40204 (2017); Jim Granato et al., The Effect of Cultural Values on Economic Development: Theory, Hypotheses, and Some Empirical Tests, 40 Am. J. Pol. Sci. 607, 613 (1996); Avner Greif, Cultural Beliefs and the Organization of Society: A Historical and Theoretical Reflection on Collectivist and Individualist Societies, 102 J. Pol. Econ. 912, 914 (1994); Luigi Guiso et al., Does Culture Affect Economic Outcomes?, 20 J. Econ. Persp. 23, 44–46 (2006); Amir N. Licht et al., Culture, Law, and Corporate Governance, 25 Int’l Rev. L. & Econ. 229, 253 (2005); Susan Rose-Ackerman, Corruption, in 1 The New Palgrave Dictionary of Economics and the Law 517, 521 (Peter Newman ed., 1998); Shalom H. Schwartz, A Theory of Cultural Values and Some Implications for Work, 48 Applied Psychol. Int’l Rev. 23, 25 (1999); René M. Stulz & Rohan Williamson, Culture, Openness, and Finance, 70 J. Fin. Econ. 313, 346 (2003); Guido Tabellini, Institutions and Culture, 6 J. Eur. Econ. Ass’n 255, 255–59 (2008); Claudia R. Williamson & Carrie B. Kerekes, Securing Private Property: Formal Versus Informal Institutions, 54 J.L. & Econ. 537, 564 (2011).

[39]. For an example of one of these world-wide surveys, Ronald Inglehart, World Values Survey wave 6 (20102014), Inst. for Social Res. (2014), http://www.worldvaluessurvey.org/WVSDocument
ationWV6.jsp.

[40]. See Peter Mühlhäusler & Rom Harré, Pronouns and People: The Linguistic Construction of Social and Personal Identity 16–18 (Peter Trudgill et al. eds.,1990); Kashima & Kashima, Culture and Language, supra note 16, at 461–64.

[41]. See Geert H. Hofstede, Culture’s Consequences 11–14 (Walter J. Lonner & John W. Berry eds., 1980) (classifying culture along the individualism-collectivism dimension). Italian, for instance, allows pronoun drop (low level of trust and respect for others), while English does not (high level of trust and respect for others).

[42]. See Shalom H. Schwartz, Beyond Individualism/Collectivism: New Cultural Dimensions of Values, in Individualism and Collectivism 85, 98 (Uichol Kim et al. eds., 1994) (classifying culture along the hierarchy-egalitarianism dimension). Italian, for instance, allows the use of different second person pronouns modulated by social distance (widespread acceptance of hierarchy), while English does not (limited acceptance of hierarchy).

[43]. See supra note 12 and accompanying text.

[44]. See Alan Watson, Legal Transplants 16–20 (Univ. of Ga. Press 2d ed. 1993); Alan Watson, Roman Law & Comparative Law 197 (1991).

[45]. See James Gordley, Comparative Law and Legal History, in The Oxford Handbook of Comparative Law 753, 761 (Mathias Reimann & Reinhard Zimmermann eds., 2006).

[46]. See Rafael La Porta et al., Legal Determinants of External Finance, 52 J. Fin. 1131, 1131 (1997) (defining modern legal origins as either English, French, German, or Scandinavian). See generally Thorsten Beck et al., Law and Finance: Why Does Legal Origin Matter?, 31 J. Fin. Econ. 653 (2003) (providing another example of legal origins); Edward L. Glaeser & Andrei Shleifer, Legal Origins, 117 Q.J. Econ. 1193 (2002) (same); Rafael La Porta et al., Law and Finance, 106 J. Pol. Econ. 1113 (1998) (same).

[47]. Rafael La Porta et al., The Economic Consequences of Legal Origins, 46 J. Econ. Literature 285, 28587 (2008).

[48]. Since many countries have undergone substantial reforms after colonization, classifying a country as a common law or a civil law jurisdiction by looking at the moment of colonization may be unwarranted. Carmine Guerriero, Endogenous Legal Traditions, 46 Int’l Rev. L. & Econ. 49, 67 (2016); Mariana Pargendler, The Rise and Decline of Legal Families, 60 Am. J. Comp. L. 1043, 1043–47 (2012). In addition, identifying the legal tradition as the country of origin of the colonizers lumps together a number of factors that are difficult to disentangle from the notion of a legal tradition, such as business culture, language, religion, preference heterogeneity and inclusiveness of political institutions, as one of us documented in previous works. See Guerriero, supra, at 67.

[49]. Clayton P. Gillette, Who Puts the Public in Public Good?: A Comment on Cass, 71 Marq. L. Rev. 534, 534–36 (1988); Mark J. Roe, Legal Origins, Politics, and Modern Stock Markets, 120 Harv. L. Rev. 460, 463 (2006).

[50]. Marco Pagano & Paolo F. Volpin, The Political Economy of Corporate Governance, 95 Am. Econ. Rev. 1005, 1007 (2005); See Bernd Hayo & Stefan Voigt, Endogenous Constitutions: Politics and Politicians Matter, Economic Outcomes Don’t, 88 J. Econ. Behav. & Org. 47, 48 (2013).

[51]. In the analysis, we measure the level of democracy by the constraints on the executive as coded in the Polity IV dataset. Monty G. Marshall & Ted Robert Gurr, Polity IV Individual Country Regime Trends, 1946-2013, Polity IV Project (June 6, 2014), http://www.systemicpeace.org/
polity/polity4.htm. Please note that this website has since been updated and its data does not exactly match the data used by this Article. We also use data on the electoral systems from Lorenz Blume et al., The Economic Effects of Constitutions: Replicating—and Extending—Persson and Tabellini, 139 Pub. Choice 197, 209–25 (2009).

[52]. See Max Weber, The Protestant Ethic and The Spirit of Capitalism 108–11 (Talcott Parsons trans., Routledge 2005).

[53]. Stulz & Williamson, supra note 38, at 315.

[54]. To test the effect of religion, we use data collected by Rafael La Porta et al., The Quality of Government, 15 J.L. Econ. & Org. 222, 234–44 (1999).

[55]. For the summary statistics of all the variables we use and the estimates of our regression, see infra app. The figure reports the residuals from regressing the variable of interest (for instance, owner protection in private sales, in the upper-left graph) on all explanatory variables and compares it with the residuals from regressing self-reliance on the same explanatory variables. Through this procedure, we capture the extent to which self-reliance explains owner protection after considering the effect of other variables.

[56]. A recent study has emphasized that the association between languages and culture is especially driven by Indo-European languages. See Lee, supra note 16, at 192. To make sure that our results are not affected by this potential problem, we repeated the analysis with countries speaking only Indo-European languages and found the same results. The sample size, though, is severely reduced, limiting the possibility of running additional tests. See the Appendix for details.

[57]. See Dari-Mattiacci & Guerriero, supra note 2, at 57173.

[58]. See Awad et al., supra note 17, at 60–64.

[59]. See supra note 19 and accompanying text.

[60]. See supra note 20 and accompanying text.

[61]. This remains true even though owner of stolen or embezzled goods may attach low or high value to them.

[62]. The desirability of buyer protection is only increased if one considers a potential feedback effect on prices. Buyer protection is likely to increase the resale price of stolen or embezzled goods, because buyers are willing to pay more if their title is more secure. In turn, the increase in price could add to the self-selection of buyers: higher prices discourage low-value buyers from entering the market, reinforcing our argumentation.

[63]. Dari-Mattiacci & Guerriero, supra note 2, at 55557; Dari-Mattiacci, Guerriero & Huang, supra note 11, at 15–16; Carmine Guerriero, Property Rights, Transaction Costs, and the Limits of the Market 3 (Dec. 4, 2018) (unpublished manuscript) (on file with authors).

[64]. See Schwartz & Scott, supra note 5, at 1372–73.

[65]. This approach is in line with a related study by Professors Lehavi and Licht, who proposed individualism as a cultural feature explaining the protection of property. Lehavi & Licht, supra note 16, at 117–18 (explaining that self-reliance encompasses individualism through the pronoun-drop feature of the language as one of its two subcomponents).

[66]. In contrast, the literature on private takings originated from Guido Calabresi & A. Douglas Melamed, Property Rules, Liability Rules, and Inalienability: One View of the Cathedral, 85 Harv. L. Rev. 1089 (1972) which almost entirely focuses on the maximization of ex post value. The problem addressed in this literature is the maximization of the chance that the good ends up in the hands of the highest value user. When voluntary transactions fail this goal because of transaction costs, involuntary transactions (takings) may be tolerated. Differently from this literature, in a GFP situation the “taking” is effectuated by an intermediary (a thief or an embezzler) rather than directly by the taker (buyer, in our setup) and hence the transaction is always involuntary from the perspective of the owner and the buyer. See Dari-Mattiacci & Guerriero, supra note 2, at 555 & n.61.

[67]. See generally Dari-Mattiacci, Guerriero & Huang, supra note 11, for a formal model of this trade-off.

[68]. We cannot exclude, however, that the ex postvalue theory could also help explain differences between private and commercial sales and between theft and embezzlement in cases were transaction costs systematically vary across these environments. The interaction between the original owner and the intermediary, and the higher complexity of commercial environments might increase transaction costs and call for weaker original owners’ property rights. See Calabresi & Melamed, supra note 66, at 1095–97; Guerriero, supra note 63 (manuscript at 26–27).

Privacy, the Hacker Way – Article by Andrea M. Matwyshyn

September 2013February 2018Prabhjyot Singh

From Volume 87, Number 1 (September 2013)
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This Article seeks to clarify the relationship between contract law and promises of privacy and information security. It challenges three commonly held misconceptions in privacy literature regarding the relationship between contract and data protection—the propertization fatalism, the economic value fatalism, and the displacement fatalism—and argues in favor of embracing contract law as a way to enhance consumer privacy. Using analysis from Sorrell v. IMS Health Inc., marketing theory, and the work of Pierre Bourdieu, it argues that the value in information contracts is inherently relational: consumers provide “things of value”—rights of access to valuable informational constructs of identity and context—in exchange for access to certain services provided by the data aggregator. This Article presents a contract-based consumer protection approach to privacy and information security. Modeled on trade secret law and landlord-tenant law, it advocates for courts and legislatures to adopt a “reasonable data stewardship” approach that relies on a set of implied promises—nonwaivable contract warranties and remedies—to maintain contextual integrity of information and improve consumer privacy.

87_1

Empty Promises – Article by Oren Bar-Gill & Kevin Davis

November 2010February 2018Rachel Feldman

From Volume 84, Number 1 (November 2010)
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Consumer contracts are pervasive. Yet, the promises that make up these contracts are becoming increasingly empty, as sellers reserve the power to modify their contracts unilaterally. While some modifications benefit both sellers and consumers, others increase seller profits at the consumer’s expense. The law’s goal should be to facilitate good modifications, while preventing bad ones. Currently this goal is not met. The problem is twofold. First, consumers fail to appreciate the risk of unilateral modification and thus fail to demand a commitment by sellers to avoid inefficient modifications. Second, and more important, even if consumers demand a commitment to make only mutually beneficial modifications, existing commitment mechanisms—consumer assent to modifications, judicial review of modifications, and seller reputation—are inadequate. We propose a novel commitment mechanism: adding Change Approval Boards (“CABs”) as parties to consumer contracts. These CABs would selectively assent to, or withhold assent from, contractual changes that sellers wish to make, according to each CAB’s modification policy. We envision a market for CABs—multiple CABs, each striking a different balance between flexibility and security, offering a range of modification policies from which consumers can choose. The market-based CAB system promises to deter abusive term changes while retaining the flexibility to change consumer contracts when change is justified.

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INTRODUCTION

I. A CRASH COURSE IN AI AND RELEVANT LEGAL THOUGHT

A. What Is Artificial Intelligence and How Can It Contract?

Artificial Intelligence’s Rise to Prominence: The “AI Boom”27Beth Miller, The Artificial Intelligence Boom, Momentum, Fall 2023, at 12, https://engineering.washu.edu/news/magazine/documents/Momentum-Fall-2023.pdf [https://perma.cc/RU8W-GJAR].

Early Applications of Artificial Intelligence to Legal Contracting

B. A “Meeting of the Minds” Regarding Contract Law Theory

C. Attorneys as Ethical and Professional Fiduciaries

II. ILLUSTRATIVE EXAMPLES

IV. EQUITY CONCERNS

A. Algorithmic Discrimination

B. Ethics of Enforcing Automated Deals

C. Who Is Liable or Accountable?

D. Data Privacy and Security Concerns

V. AI: ARTIFICIAL INTELLIGENCE OR ACCURACY ISSUES?

VI. LEGAL PROFESSION CHALLENGES

VII. EMPIRICAL RESEARCH: “HIRING” CHATGPT IN A CONTRACT NEGOTIATION

D. Overall Trends and Conclusions

E. Shortcomings

VIII. ENOUGH NEGATIVITY—WHAT IS AI GOOD AT?

CONCLUSION

99 S. Cal. L. Rev. 239

INTRODUCTION

I. BACKGROUND

A. Contract Common Law: Offer and Acceptance

B. From Shrinkwrap to Clickwrap

1. Step-Saver and ProCD

2. Online Contracts Today

C. Second and Ninth Circuit Decisions: Nguyen, Berman, and Specht

II. CASE LAW SURVEY

A. California State Courts

1. Clickwrap Agreements

2. Browsewrap Agreements

3. Sign-In-Wrap Agreements

B. U.S. District Courts in California

1. Clickwrap Agreements

2. Scrollwrap Agreements

3. Browsewrap Agreements

4. Sign-In-Wrap Agreements

C. Summary of Findings

1. Standards of Notice

2. The Erosion of Distinct Wrap Categories

3. The Relevance of Step-Saver and ProCD

CONCLUSION

APPENDIX A. Surveyed Cases in California State Courts

APPENDIX B. Surveyed Cases in U.S. District Courts in California

98 S. Cal. L. Rev. 419

From Volume 92, Number 4 (May 2019) DOWNLOAD PDF

From Volume 92, Number 4 (May 2019) DOWNLOAD PDF

From Volume 92, Number 4 (May 2019) DOWNLOAD PDF

From Volume 87, Number 1 (September 2013) DOWNLOAD PDF

From Volume 84, Number 1 (November 2010) DOWNLOAD PDF

Artificial Intelligence’s Rise to Prominence: The “AI Boom”²⁷

From Volume 92, Number 4 (May 2019)
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From Volume 92, Number 4 (May 2019)
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From Volume 92, Number 4 (May 2019)
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From Volume 87, Number 1 (September 2013)
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From Volume 84, Number 1 (November 2010)
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