Law & psychology: Limits of a contract

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legal gavel and a business contract

By Ali Abdi

The extension of psychology to a broader array of legal issues is inevitable. Law and psychology occupy a special place in the “law and” pantheon. That is, psychology and law share a common purpose: both constitute efforts to predict and control human behaviour.
Law, on the one hand, has historically relied on ad hoc accounts of human behaviour that are motivated by ideology, anecdote, and historical accident. Psychology, on the other, offers an empirical, scientific source for theories of human behaviour. So far, we have only begun to see how the scientific study of human behaviour is reshaping the study of law.

This inter-dependency between law and psychology is now blazing a new trail of legal understanding by inspiring unique jurisprudence that seeks to answer crucial questions, like what we need to make the society good, not just what we think it practical to advocate today. Can we alter law so significantly that it can become a force for justice, or does law just help those who already maintain control?

As we try to answer these questions, the goal will be to raise awareness about the nature of law and its consequences, such that instead of helping law portray itself as a neutral seeker of justice, psychology can help us expose its false consciousness and awaken the sense of injustice. In the long run, this law psychology relationship can help us aspire to the role of law transformers or system shakers by seeking real substantive change, rather than remaining content – even complacent – to serve as technicians and tinkerers in the law.

One basic source of tension between psychology and law is that “psychology is descriptive and law is prescriptive” (Haney, 1981). That is, psychology tells us how people actually behave, and the law tells us how people ought to behave. The primary goal of psychological science is to provide a full and accurate explanation of human behaviour. The primary goal of the law is to regulate human behaviour. And, if someone behaves in a way that the law forbids, the law provides for punishment.

Put somewhat idealistically, psychological science is mainly interested in finding truth, and the legal system is mainly interested in rendering justice. Although neither absolute truth nor perfect justice is fully attainable, scientists must strive for an approximation of truth and courts must strive for an approximation of justice.

The basic principle of contract law is that courts do not inquire into the adequacy of consideration, and that a mere inadequacy of consideration will not void a contract. This can be loosely understood as a principle which enjoins a court of law to enforce a contract as made without reviewing their terms, and also to not only enforce the contract but to enforce them to their full extent, so that damages for breach are measured by the value the promised performance would have had to the injured party. Psychology, on its part, supports the view that parties are normally the best judges of their own utility, and normally reveal their determinations of utility in their promises. This proposition rests on the view that, in making a bargain, a contracting party will act with full psychological understanding to rationally maximise expected interest from the bargain.

Notwithstanding the above, contracts law sets certain limits on the enforcement of contracts. The sole purpose of these limits is that a party to a contract who has bargained unfairly should not be able fully to enforce the resulting contract. Similarly rooted as the principle of unconscionability, these limits are now demanding that courts provide rules and directions for review of contracting behaviour that involve some kind of unfair exploitation of one party by the other, such as in the doctrine of unfair surprise.

However, the limits of a contract cannot be fully attained on the basis of unfair exploitation; rather, they can best be explained by psychology on the basis of the limits of human understandings and expectations.

Contracts are usually made under circumstances of uncertainty as they concern the future. A party to a contract who must make a choice in the face of uncertainty will rationally select the option that maximises his expected interest. This psychological trend depicts a view that parties in a contract violate the standard expected choice of their actions due to limits of their cognitive abilities. The first limit of cognition that may affect parties to a contract is the limit based on defective capability.

Psychology depicts people as unrealistically optimistic and that defects in their capability may distort their understanding of certain information and views on a scenario. Amos Tversky & Daniel Kahneman in their book Rational Choice and the Framing of Decisions, point out that expectations emerge from a logical analysis of chance rather than from a psychological analysis of risk and value. This understanding has established the cognitive psychology view that real people use certain decision-making rules and heuristics that yield systematic errors.

For example, a basic assumption of expectation is that a decision-maker’s preference between two options should not depend on how a choice is characterised and presented or “framed”. The framing effect of contracts has, in recent times, been infested with all kinds of conmanship that many people will stand by their inconsistent choices even when they know of the inconsistencies. This is a clear representation of how parties to a contract use flawed heuristic tactics to their favour. The effect to these actions is relevant to contract law as they explain how sellers can manipulate the actions and preference of buyers by using perceptual illusions more than actual representations.

Another type of defect is a party’s faulty risk estimation. This is a plausible hypothesis as put by Kenneth J. Arrow in Risk Perception in Psychology and Economics (1982), that individuals are unable to recognise that there will be many surprises in the future. In short, as most other evidence tends to confirm, there is a propensity to underestimate uncertainties. Therefore, these defects in cognition are also closely related to how parties to a contract interact with the dispositional problem of unrealistic optimism: If parties are unrealistically optimistic, they will systematically underestimate risks, and if they systematically underestimate risks, they will be unrealistically optimistic. So how do these cognitive psychology understandings affect the law of contracts?

Application

The limits of psychology bear with it special interest in the law of contracts. Courts of law need to recognise that these types of interest require special treatment, but typically this special treatment is not explicitly justified on the basis of cognitive psychological limits of a contract. As a result, the relevant doctrines in the law of contract often seem to lack a satisfactory or even coherent explanation. The limits of cognition both provide that explanation and help to show how the doctrines should be fashioned. The inter-relation application of law and psychology can best be illustrated on form contracts.

Contract law scholars have, in recent times, been preoccupied by the view that the cause of contract law’s undoing is the standard form contract. Once considered the exception to the general rule, that contracts require minds to meet on terms. However, the standard form contract now is the general rule and with it, there is not, never was, and never will be a “meeting of the minds” in the forum of standard form contracts. Consent in this view is irrelevant to make a contract effective. The primary area of concern is the enforceability of pre-printed terms and the import of pre-printed terms in determining whether a form sent in response to an offer constitutes an acceptance.

To begin with, most pre-printed terms are non-performance terms that relate to the future and concern low-probability risks. Accordingly, the cognitive phenomenon of rational ignorance plays a particularly powerful role. The effects of a form contract’s pre-printed terms of provision on a contracting party’s baseline legal rights are more obscure, and sometimes unknown to them as they are full of verbal and legal obscurity.

The law therefore needs to respond to the problem raised by the limits of cognition in the context of pre-printed terms by limiting the effect of such terms in the contexts of contract formation and contract enforceability. Courts of law therefore need to take into consideration aspects of law that protect the innocent party to a contract and, in particular, the common law doctrine of unfair surprise.

Under this doctrine, a contractual provision will not be enforced if one party to a prospective written contract includes a term in the writing that he knows or should know will violate the reasonable expectations that the other party has formed on the basis of such elements as the actually negotiated terms and the circumstances surrounding the transaction; this doctrine is best suited in application to pre-printed terms.

The limits under cognitive psychology support this doctrine from the view of a superstructure of fault. The doctrine requires not only surprise but also unfair surprise. Certainly, it is unfair and unconscionable for a contract party to include in a written contract a pre-printed term that he knows or should know will violate the other party’s reasonable expectations.

This has therefore led the courts to raise the question of standard on whether a relevant term is conspicuous and clearly written. In Williams v. Walker-Thomas Furniture Co. 350 F.2d 445, 449 (D.C. Cir. 1965), the court emphasised the importance of determining whether the term was “hidden in a maze of fine print”. Also, in Gerhardt vs. Continental Insurance Co. 48 NJ. 291, 225 A.2d 328 (1966), the court refused to enforce an obscurely worded exception to a comprehensive liability policy on the grounds that the term was neither conspicuous nor plain and clear. Accordingly, it should not matter whether a pre-printed term is clearly written and conspicuous. Unless a party to a contract is made aware of pre-printed terms, such as through the negotiations or by a clear oral statement, even clearly written and conspicuous pre-printed terms should be invalid if they would infringe on the reasonable expectations of the other party.

Therefore, the rule governing the enforceability of pre-printed terms should not only turn on fairness, as in the doctrine of unfair surprise but rather, the rule should turn and focus strictly on the limits of cognition and be supported by the basic principles of interpretation. In Weaver vs. American Oil Co. 257 Ind. 458, 276 N.E.2d 144 (1971), the court held that the provision was unenforceable, because the party seeking to enforce such a contract has the burden of showing that the provisions were explained to the other party and came to his knowledge and there was in fact a real and voluntary meeting of the minds and not merely an objective meeting.

This in my view clearly supports the law and Psychology relationship by showing that the law is moving toward basing the enforceability of pre-printed terms, as well as the role of such terms in contract formation, purely on the limits of cognitive psychology, rather than on basing solely on unfairness.

Limits of cognitive psychology

The law has always recognised the limits of cognitive psychology and that from the resultant principles, the Kenyan Courts of Law need to rise from the legal fog and use the limits of cognition to shape existing law of contract principles and understand what new principles need to be developed. Similarly, just to exemplify, the limits of cognition can help explain, at least in part, why gifts are irrevocable while promises to make gifts are unenforceable. The actual transmission of a gift powerfully focuses the donor’s cognition on the consequences of her act. The limits of cognition also underpin the doctrines of mutual mistake and changed circumstances, in that both of these doctrines are in significant part based on cognitive psychology bounded rationality.

Of course, the limits of cognition are not a universal explanation of either contract law or the limits of contract, but can help courts of law and contract law scholars understand the psychological framework within which parties to a contract operate when making choices.

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