Document Type

Article

Publication Title

Valparaiso University Law Review

Abstract

Many judges and scholars seem to consider the rules assigning liability for fraud-and sometimes even negligence-in contract formation to be among the few mandatory rules of the contracting game. This belief persists in spite of the fact that virtually every other rule of contract law is treated as a default rule, and therefore, subject to modification by agreement of the parties. The leading case of Bates v. Southgate provides a classic demonstration of this belief. Justice Qua, writing for the court held, "the same public policy that in general sanctions the avoidance of a promise obtained by deceit strikes down all attempts to circumvent that policy by means of contractual devices.... To refuse relief would result in opening the door to a multitude of frauds and in thwarting the general policy of the law." The main goal of this paper is to attempt to identify the public policy that formed the basis of Justice Qua's decision. The discussion is organized as follows. Part II provides an overview of the applicable legal doctrines. Part III describes the apparent conflict between the will theory of contract law, which suggests that explicit disclaimers of liability should be enforced, and theories which suggest that contractual enforceability should depend on notions of morality or economic efficiency and weigh against enforcement. Part IV discusses recent attempts to justify enforcement of disclaimers of liability in economic terms as a response to the facts that litigation is costly and can sometimes be effectively replaced by non-legal sanctions. This rather lengthy introduction to the current state of the literature is designed to set the stage for the analysis in Part V. There I identify the under-appreciated role that enforceable disclaimers of liability for precontractual misrepresentations, whether fraudulent or not, might play in minimizing agency costs. I also contend that permitting principals to disclaim vicarious liability for their agents' misrepresentations is compatible with conventional notions of morality. Part VI provides illustrations of how this revised understanding can be used to resolve a variety of archetypal disputes without contravening any of the values that most people think are or should be embodied in contract law. I also suggest that this revised understanding makes it easier to understand the results of a number of decided cases. Part VII summarizes that understanding in terms which should be useful to lawmakers. Part VIII contains a brief conclusion.

First Page

485

Volume

33

Publication Date

1999

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