The Social Cost of Contract

38 Pages Posted: 26 Jun 2020 Last revised: 10 Sep 2020

See all articles by David A. Hoffman

David A. Hoffman

University of Pennsylvania Law School; Cultural Cognition Project at Yale Law School

Cathy Hwang

University of Virginia School of Law

Date Written: June 25, 2020

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.

This Essay builds on that observation in making two contributions. Theoretically, it characterizes contracts as bargains that always 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

Suggested Citation

Hoffman, David A. and Hwang, Cathy, The Social Cost of Contract (June 25, 2020). Columbia Law Review, Forthcoming, U of Penn, Inst for Law & Econ Research Paper No. 20-42, Virginia Public Law and Legal Theory Research Paper No. 2020-65, Virginia Law and Economics Research Paper No. 2020-15, Available at SSRN: https://ssrn.com/abstract=3635128 or http://dx.doi.org/10.2139/ssrn.3635128

David A. Hoffman (Contact Author)

University of Pennsylvania Law School ( email )

3501 Sansom Street
Philadelphia, PA 19104
United States

Cultural Cognition Project at Yale Law School

127 Wall St
New Haven, CT 06520
United States

Cathy Hwang

University of Virginia School of Law ( email )

580 Massie Road
Charlottesville, VA 22903
United States

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