Jeremiah Ho, ‘Why Flexibility Matters: Inequality and Contract Pluralism’

Abstract
In the decade since the Great Recession, various contract scholars have observed that one reason the financial crisis was so ‘great’ was due in part to contract law – or, more precisely, the failures of contract law for not curbing the risky lending practices in the American housing market. However, there is another reason why contracts made that recession so great: contracts furthered inequality. In recent years, when economic inequality has become a dominant national conversation topic, we can see development of that inequality in the Great Recession. And indeed, contract law was complicit. While contractual flexibility and innovation were available to soften the blow of large commercial deals gone wrong during the crisis, residential mortgage defaults across the US were subject to strict contractual formalism that led to severe consequences for those pursuing one of the hallmark prizes of the American Dream, homeownership. Specifically, cases during the Great Recession featured commercial parties relying on the gravity of the Great Recession as the reason why their contract breaches ought to be excused through doctrines such as impracticability. Although impracticability defenses premised on economic changes are usually unconvincing, commercial claimants during the Great Recession had some surprising successes and advantages in taking such positions. Meanwhile, hundreds of thousands of homeowners, whose abilities to honor their mortgage agreements were also hindered by the economic downturn, could not predicate their defaults on the crisis and get away with it. Instead, they were subject to rigid contract formalism. The entitlement to flexible and innovative excuse arguments seemed particularly exclusive to commercial claimants during the Great Recession. And contract law helped sustain that exclusivity. Therein lies the inequality.

This Article’s ultimate goal is not to argue, like others already have, for the efficacy of expanding contract excuse doctrines in significant times of crisis. Instead, the heart of this Article’s investigation examines, using the example of impracticability arguments during the Great Recession, why commercial parties had more access to flexibility in contracts than others in order to point out how it resonates societally for contracts. Modern contract law furthered inequality when it could have been more instrumental in advancing social mobility and economic opportunity. Thus, this Article’s observations ultimately support the idea that rather than formalism, contract pluralism ought to be adopted in order to give contracts a more meaningful role in furthering a fair and just society.

Ho, Jeremiah A, Why Flexibility Matters: Inequality and Contract Pluralism (September 15, 2017). UC Davis Business Law Journal, forthcoming.

First posted 2017-10-06 06:56:44

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