Coming to Terms: Using Contract Theory to Understand the Detroit Water Shutoffs

Marissa Jackson Sow

After the City of Detroit underwent financial takeover and filed the largest municipal bankruptcy in American history in 2013, the city’s emergency manager encouraged mass water shutoffs as a way of making the city’s water utility a more attractive asset for sale—and for privatization—by ridding the water department of its association with bad debt. The sale never took place, but the water shutoff, too, became the largest ever in American history, with over 141,000 homes subjected to water disconnections over a period of over six years. The governor of the State of Michigan ordered that the shutoffs be temporarily suspended for the duration of the COVID-19 health emergency in March 2020 and that water be restored to homes that had been disconnected from water services.

Human and civil rights activists and health officials have long sought the end of the shutoff campaign for several reasons: It disproportionately impacts Black people, subjects residents to subhuman living conditions and serious health risks, and remains ineffective at redressing the underlying problems that prompted the shutoff in the first place. For attorneys and activists advocating on behalf of Detroiters, pleading violations of civil and human rights laws, however, has proven unavailing in the courts, as well as at the seats of local or state government; even condemnations from the United Nations did not convince the City of Detroit or the State of Michigan to put a permanent end to the water shutoffs, their lack of success and high human cost notwithstanding.

This Essay articulates a radical theory of contract to clarify the relationships between the people of Detroit and the local, state, and federal governmental bodies exercising jurisdiction over them and to explain why the shutoffs persist. A racial contract exists amongst Michigan’s white body politic, which seeks the exploitation of Black people and resources—including Detroit’s water. Performance of the contract requires the dehumanization and exclusion of Black Detroiters in order to establish and maintain a rent-seeking order in which Black people effectively subsidize the delivery of water and sewage services to white suburbanites who view Black governance and Black proprietorship as a breach of the social order for which the suburbanites bargained. The City of Detroit has been able to rely on anti-Black narratives and beliefs to create the mirage of a contractual relationship with Detroit residents that Detroiters have breached; in reality, however, because of the racial contract, Black people lack the capacity to enter into bargained-for agreements with their local government; rather, the City of Detroit and the regional water authority have contracted amongst themselves, treating Black people’s use of water as an externality resolved through taxation.

Closing the Racial Wealth Gap

Mehrsa Baradaran

This Article explores a few remedies to closing the racial wealth gap rooted in a theory of contract damages. The U.S. government has failed to live up to its promises to Black Americans to treat them equally under the law and thus a remedy is justified. Though a full reparations program is necessary and theoretically justified, this Article does not focus on a full-scale reparations program. Rather, the Article explores how a housing grant might work as one solution to closing the racial wealth gap given the current constitutional interpretation and political barriers.


Contracting for Personal Data

Kevin E. Davis, Florencia Marotta-Wurgler

Is contracting for the collection, use, and transfer of data like contracting for the sale of a horse or a car or licensing a piece of software? Many are concerned that conventional principles of contract law are inadequate when some consumers may not know or misperceive the full consequences of their transactions. Such concerns have led to proposals for reform that deviate significantly from general rules of contract law. However, the merits of these proposals rest in part on testable empirical claims. We explore some of these claims using a hand-collected data set of privacy policies that dictate the terms of the collection, use, transfer, and security of personal data. We explore the extent to which those terms differ across markets before and after the adoption of the General Data Protection Regulation (GDPR). We find that compliance with the GDPR varies across markets in intuitive ways, indicating that firms take advantage of the flexibility offered by a contractual approach even when they must also comply with mandatory rules. We also compare terms offered to more and less sophisticated subjects to see whether firms may exploit information barriers by offering less favorable terms to more vulnerable subjects.

A Contractarian Argument Against the Death Penalty

Claire Finkelstein

Opponents of the death penalty typically base their opposition on contingent features of its administration, arguing that the death penalty is applied discriminatorily, that the innocent are sometimes executed, or that there is insufficient evidence of the death penalty’s deterrent efficacy. Implicit in these arguments is the suggestion that if these contingencies did not obtain, serious moral objections to the death penalty would be misplaced. In this Article, Professor Finkelsteindeterrence and retributivismis capable of justifying the death penalty. More generally, she suggests that while each theory captures an important part of the justification for punishment, each must appeal to some further limiting principle to accommodate common intuitions about appropriate punishments for crimes. Professor Finkelstein claims that contractarianism supplies this additional principle, by requiring that individuals consent to the system of punishment under whose threat they must live. Moreover, on the version of contractarianism for which she argues, they must do so based on a belief that they will benefit under the terms of that system as compared with how they would fare in its absence. While the notion of benefit is often best understood in terms of maximizing one’s expected utility, Professor Finkelsteingambling” decision rule. She then argues that rational contractors applying this conception of benefit would reject any system of punishment that includes the death penalty. For while contractors would recognize the death penalty’s deterrent value, they must also consider the high cost they would pay in the event they end up subject to such a penalty. This Article presents both a significant new approach to the death penalty and a general theory of punishment, one that incorporates the central intuitions about deterrence and desert that have made competing theories of punishment seem compelling.

Of Equal Wrongs and Half Rights

Gideon Parchomovsky, Peter Siegelman, Steve Thel

With a tiny handful of exceptions, common law jurisprudence is predicated on a “winner-take-all” principle: The plaintiff either gets the entire entitlement at issue or collects nothing at all. Cases that split an entitlement between the two parties are exceedingly rare. While there may be sound reasons for the all-or-nothing rule, in this Article we argue that there is a limited but important set of property, torts, and contracts cases in which an equal division of an entitlement should be adopted. The common element in these cases is a windfall—a gain or loss that occurs despite the fact that no effort to promote, prevent, or allocate it ex ante would be cost-justified or reasonable. We show that an equal division of disputed windfalls promotes both efficiency and fairness and also has the virtue of clarifying several tortured legal doctrines.

We also address and reject the standard objections to split-the-difference remedies. We demonstrate that the introduction of a splitting option is unlikely to distort judicial incentives, and that it is likely to improve the integrity of the judicial system. Counterintuitively, we show that giving judges the option to order a compromise remedy in windfall disputes is likely to reduce judicial error, rather than increase it, and that the valuation problems that attend the introduction of a split-the-difference rule are insignificant.

Three Pictures of Contract: Duty, Power, and Compound Rule

Gregory Klass

There is a fundamental divide among theories of contract law between those that picture contract as a power and those that picture it as a duty. On the power-conferring picture, contracting is a sort of legislative act in which persons determine what law will apply to their transaction. On the duty-imposing picture, contract law places duties on persons entering into agreements for consideration, whether they want them or not. Until now, very little attention has been paid to the problem of how to tell whether a given rule is power conferring or duty imposing—a question that should lie at the center of contract theory.

This Article argues that legal powers have two characteristic features. First, there is an expectation that actors will satisfy the rules with the purpose of achieving the associated legal consequences. Second, the legal rules are designed to facilitate such uses. A law might exhibit these features in either of two ways, which define two types of legal powers. Many laws that create legal powers employ conditions of legal validity, such as legal formalities, designed to guarantee the actor’s legal purpose. The presence of such validity conditions is strong evidence that the law’s sole function is to create a legal power, and I suggest reserving the term “power conferring” for such laws. Other laws anticipate and enable their purposive use without conditioning an act’s legal consequences on the actor’s legal purpose. The structure of such laws suggests that they function both to create powers and to impose duties. I coin the term “compound rule” for laws that satisfy this description and argue that the contract law we have is a compound rule. The dual function of compound rules provides empirical support for pluralist justifications of contract law. An example of such a theory can be found in Joseph Raz’s comments on the relationship between contract law and voluntary obligations.

Efficient Breach Theory Through the Looking Glass

Barry E. Adler

A party in breach of contract cannot sue the victim of breach to recover what would have been the victim’s loss on the contract. The doctrinal rationale is simple: A violator should not benefit from his violation. This rationale does not, however, provide an economic justification for the rule. Indeed, efficient breach theory is founded on the proposition that a breach of contract need not be met with reproach. Yet the prospect of recovery by the party in breach—that is, the prospect of negative damages—has received scant attention in the contracts literature. Close analysis reveals potential costs to disallowance of negative damages, particularly where a party with private information about the benefits of termination also has an incentive to continue under the contract. These costs can arise both ex post, at the time of a performance-or-termination decision, and ex ante, in anticipation of that decision. Nevertheless, allowance of negative damages could impose its own costs, where background information would create an incentive to repudiate a contract before either party could gather more information, for example. Ex ante contractual provisions, such as liquidated-damages or specific-performance clauses, permit parties some latitude to balance the costs of disallowance and allowance of negative damages, albeit imperfectly. Common law limitations on the mitigation duty may be seen as a mechanism to approach this balance in the absence of an explicit con- tractual solution.

The Unconscionability Game: Strategic Judging and the Evolution of Federal Arbitration Law

Aaron-Andrew P. Bruhl

This Article uses recent developments in the enforcement of arbitration agreements to illustrate one way in which strategic dynamics can drive doctrinal change. In a fairly short period of time, arbitration has grown from a method of resolving disputes between sophisticated business entities into a phenomenon that pervades the contemporary economy. The United States Supreme Court has encouraged this transformation through expansive interpretations of the Federal Arbitration Act. But not all courts have embraced arbitration so fervently, and therefore case law in this area is marked by tension and conflict. The thesis of this Article is that we can better understand developments in arbitration doctrine by viewing the case law as the product of an ongoing strategic interaction between courts with differing preferences regarding the spread of arbitration. As the Supreme Court has shut off most other means of resisting arbitration, the state law doctrine of unconscionability has in the last several years become a surprisingly attractive and successful tool for striking down arbitration agreements. The nature of unconscionability analysis is that it is flexible, which provides opportunities for courts skeptical of arbitration to use the doctrine to evade the Supreme Court’s pro-arbitration directives while simultaneously insulating their rulings from Supreme Court review. Sophisticated resistance to arbitration is just one side of the story, however. The approach employed in this Article examines the judicial system as a whole, including the ways pro-arbitration courts respond, sometimes indirectly, to what they perceive as manipulation of unconscionability. The suspicion that some courts are disfavoring arbitration drives pro-arbitration courts to change their strategies, such as by establishing new doctrine that facilitates monitoring and shifts decisionmaking authority. This strategic framework can help us make sense of otherwise puzzling trends in arbitration doctrine and can help us predict what moves will be next. Although the specific subject matter is arbitration, this analysis is also aimed at those interested in more general problems of judicial federalism.

Automating Contract Law

George S. Geis

The study of contract law is undergoing a difficult transition as it moves from the theoretical to the empirical. Over the past few decades scholars have focused largely on developing economic theories that offer a normative approach to setting the legal rules governing voluntary exchange. The time has now come to test whether these theories provide a meaningful basis for choosing our laws—in other words, to ask whether empirical data supports the theoretical models that contracts scholars have posited. Unfortunately, this type of empirical analysis has proven exceptionally difficult to conduct, and some commentators are beginning to question whether it will ever be possible to test and revise our economic theories of contract in a meaningful manner. Yet the problem of harnessing information to support complex decisions is not unique to contract law. This Essay explores the possibility that recent technological developments from the field of organizational knowledge management—including advances in meaning-based computing algorithms—will soon make it easier to conduct empirical work in contract law on a much larger scale.

Contract Design and the Structure of Contractual Intent

Jody S. Kraus, Robert E. Scott

Modern contract law is governed by a two-stage adjudicative regime—an inheritance of the centuries-old conflict between law and equity. Under this regime, formal contract terms are treated as prima facie provisions that courts can override by invoking equitable doctrines so as to substantially “correct” the parties’ contract by realigning it with their contractual intent. This ex post judicial determination of the contractual obligation serves as a fallback mechanism for vindicating the parties’ contractual intent whenever the formal contract terms fall short of achieving the parties’ purposes. Honoring the contractual intent of the parties is thus the central objective of contract law. Yet little scholarly attention has been given to the structure of contractual intent. Courts naturally equate contractual intent with the parties’ contractual objectives, which we call the “contractual ends” of their collaboration. But reaching agreement on a shared objective is only the first step to designing an enforceable contract. Thereafter, the parties must create the particular rights and duties that will serve as their “contractual means” for achieving their shared ends. The thesis of this Article argues that the current regime of contract adjudication conflates the parties’ contractual means with their contractual ends. In so doing, it reduces the range of contractual arrangements to which contract law gives effect, thereby potentially depriving commercially sophisticated parties of essential tools for contract design. Sophisticated actors engage in ex ante determinations of their means of enforcement, choosing whether enforcement is to be either legal or relational and whether legal enforcement should rely on either rules or standards. Both theory and available evidence suggest that such parties would prefer a default rule that strictly enforces formal contract doctrine unless they have expressly indicated their intent to delegate hindsight authority to a court. By eliminating the risk that courts will erroneously infer the parties’ preference for ex post judicial intervention, such a regime increases the reliability of formal contract terms and enhances the parties’ control over the content of their contract.