Works in Progress Group #16 Contracts

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Session Type: Works-in-Progress

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Rational Contract Design

In contracts, the choice between vague standards and precise rules is central to both theory and practice. Among scholars, the undisputed paradigm is a model that this article calls the “cost optimization theory,” under which parties perform a cost-benefit analysis with respect to each possible term, balancing front-end transaction costs against back-end enforcement costs. Despite this theory’s broad acceptance, Professor Thomas' article is the first to explore it in depth, to offer significant improvements to it, and to propose practical ways to implement it.

Though intuitive and insightful, the theory relies on unrealistic assumptions that ignore typical negotiation dynamics, limiting its real-world applicability. Portraying transactional practice more accurately, this Article revises the model to reflect that parties may strategically withhold information and would aim to optimize their individual costs, not their collective costs. Regardless of these improvements, however, any comprehensive cost-benefit analysis of contract terms is practically impossible and prohibitively expensive under ordinary cognitive constraints, so even attempting it is usually irrational.

Toward a truly rational approach to contract design, appropriate heuristics—decision-making strategies that consider certain key information and ignore the rest—could work better than optimization methods, as in many situations of great uncertainty. Accordingly, this Article develops and demonstrates a decision tree for choosing among vague and precise provisions. While omitting much unknowable information required by a cost-benefit analysis, this tool can lead to more efficient language more often. With practical techniques like this, drafters can avoid the cost optimization theory’s prescriptive limitations while harnessing its normative insights.


The Price of Freedom: Bailey v. Alabama, Racial Capitalism, and Contract Formation

In 1911, the Supreme Court famously overturned the practice of debt peonage in Bailey v. Alabama. According to the Court, an Alabama statute holding a Black man criminally liable for refusing to continue working for his employer to pay off his salary advance was a form of indentured servitude. The Court ignored the plaintiff Alonzo Bailey’s race and focused its analysis on the constitutionality of compulsory labor as a punishment for crime, concluding that the law violated the Thirteenth Amendment. However, the Court failed to question the legitimacy of exploitative labor contracts of that era on pure contract formation grounds. Put simply, in the case of Alonzo Bailey, was there ever a contract to begin with?

Professor Toussaint's article employs the theory of racial capitalism to clarify how contract law has been weaponized to subordinate Black and minoritized populations in the United States. First, the article argues that the roots of Black “underdevelopment” in U.S. political economy, as described by historian Manning Marable, resides in the “underdetermination” of the ideal of liberty in contract law. Second, the article contends that the underdetermination of liberty in contract law was leveraged by courts to legitimate, on ethical grounds, the formation of unjust labor contracts like that of Bailey v. Alabama. In so doing, the evolution of contract law has facilitated the exploitation, expropriation, and erasure of Black and minoritized people in furtherance of a racial order premised on white supremacy. This article concludes by articulating the foundational elements of a non-objective justice-based theory of contract formation to overcome the continuing challenges of racism in America.