The Social Cost of Contract

Abstract

When private parties perform contracts, the public bears some of the costs. But what happens when society confronts unexpected contractual risks? During the COVID-19 pandemic, completing particular con­tracts—such as following through with weddings, conferences, and other large gatherings—will greatly increase the risk of rapidly spreading disease. A close reading of past cases illustrates that when social hazards sharply increase after formation, courts have sometimes rejected, re­formed, and reinterpreted contracts so that parties who breach to reduce external harms are not left holding the bag. We describe these cases as a sort of contractual anticanon: where social, and not private, ends are the focus of contract judges.

This Essay builds on that observation in making two contributions. Theoretically, it characterizes contracts as bargains that always implicitly involve the public. Law has three tools at hand to govern contract’s social cost: delineating subject matter about which parties can bargain, interacting with parties as a regulator, and, finally, interpreting and reforming in court. Post hoc consideration of social costs is the least well known, and most unsettled, mode of governing contract externalities. We ground that technique in its history as a specialized application of the law of contract public policy. Practically, this Essay advises parties negotiating whether and how to perform to consider the public’s health, since history teaches that, at least some of the time, courts will too.

Keywords: COVID-19, force majuere, contract, pandemic, risk, interpretation, reformation, ADR, MDL, Coronavirus

JEL Classification: K12