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

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

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

 

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 lawthe actual legal situationin the United States and Germany.

Put simply, the relationship between the aforementioned four aspects is as follows: Many traditional moral philosophersfrom Aristotle to St. Augustine and from Thomas Aquinas to Immanuel Kantstrictly 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 handinhand. 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 moralphilosophical 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 nearconsensus 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 mostthough not in allcases 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 alsoalmost without exceptionreflected 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 Rechtsgefühleven that of German judgesdeems 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 fromklug 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 78 (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 3346; 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) (15831645) (“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 *2021 (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.

 [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. 4750; 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, 82324 (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 (62829), 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, (55859) 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: MedizinRechtGeschichte (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 85111 (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. 138283, 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 “gespaltenenArglist 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, 1819 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

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 nineteenthcentury movement to harmonize and make uniform the laws of the states. The UCC is a joint product of the American Law Institute (theALI”), a private nonprofit 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, 52027 (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 2834 (4th ed. 2015).

 [15]. See Margaret J. Radin, Boilerplate: The Fine Print, Vanishing Rights, and the Rule of Law 1215, 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 68 (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, 16891750, 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. 1215c. 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 £2040 category; for the others from £2 for those with goods over £1,000 down to 1s. for those in the £20200 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 86163.

 [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, 17761790, 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, 150506 (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, 16465 (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 5758 (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 21922 (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, 60507 (1973).