The prevailing literature on contract theory does not adequately address the way real world lawyers address uncertainty in complex business transactions.

Jeffrey M. Lipshaw

We proceed on the assumption that the true and the good, and just possibly the beautiful, coincide. Where they do not, we demand an account. The urge to unite is and ought stands behind every creative endeavor. Those who seek to unite them by force usually do more harm than they set out to prevent. Those who never seek to unite them do nothing at all.1

A purely stable world permits of no illusions, but neither is it clothed with ideals. It just exists. To be good is to be better than


The prevailing literature on contract theory does not adequately ad¬dress the way real world lawyers address uncertainty in complex busi¬ness transactions. I attribute this to the constraints imposed by thinking in legal models, the dominant tendency to turn to economics for analysis and normative prescription, and the focus on adjudicative issues of hindsight interpretation. The behavior of lawyers and busi¬ness people in the course of complex commercial transactions and re

* Adjunct Professor, Indiana University School of Law–Indianapolis

1. SUSAN NEIMAN, EVIL IN MODERN THOUGHT 322 (2002). Prefacing with a quote from a

book about evil is not as far-fetched as it may seem. Neiman’s work is a revisionist history of modern philosophy, arguing that a meaningful understanding of the great thinkers since the Enlightenment can be based on how they approached the question: Why is it that things in the world go very, very wrong? Coming to terms with great natural or moral evils, like the Lisbon earthquake or the Holocaust, respectively, is for philosophers like Neiman. Business lawyers rarely deal with true evil (although we may feel that way in the twentieth hour of a day with a tough adversary). We deal with more mundane things going inexplicably wrong, like the lender reneging on its commitment out of the blue, or the stock market crash of October 1987 causing an acquisition to fall through. Nevertheless, the same philosophy can be instructive. That is the lesson of this Article.


1074 DEPAUL LAW REVIEW [Vol. 54:1073

lationships suggest homo economicus is not the only model of human behavior, even in economic relationships: This is particularly true in complex business transactions, like merger and acquisition (M&A) or venture capital work.3

Commercial uncertainty, and the law’s response to it, is only a sub¬set of the broader philosophical issue of contingency. How the law and lawyers deal with transactional uncertainty is merely a subset of how we as human beings come to terms with the uncertainty of the world, individually or socially. When we write contracts, we deal with contingent events, those with “[t]he property of not having to occur.”4 Some scholars have recognized that the law of contracts is not the only way business people may attempt to deal with contingency .5 Very few have tried to address it as a matter of philosophy. I am neither a professional economist nor a philosopher, but I will never¬theless try to answer Martha Nussbaum’s call to link the real world of dealmaking to historic sources of philosophy and jurisprudence.6 First, I will counter those current thinkers who believe, like some of their philosophical forebears, that they have found the one predomi¬nant way of thinking about the world. Second, this Article suggests, in the philosophical tradition, alternative cross-disciplinary contexts for law and lawyers. Finally, I suggest a role for lawyers in completing deals that invokes a (perhaps unscientific) pragmatic idealism.7

3. In other contexts, see Jeffrey M. Lipshaw, Sarbanes-Oxley, Jurisprudence, Game Theory, Insurance and Kant: Toward a Moral Theory of Good Governance, 50 WAYNE L. REV. (forth¬coming 2005) (manuscript at 33–41), available at (discussing how corporate board responses to Sarbanes-Oxley and the nature of board service suggest, from the standpoint of philosophy, that directors respond to law, economics, and morality simultaneously, notwithstanding the contradictions that may exist among them)


5. See generally, e.g., ERIC A. POSNER, LAW AND SOCIAL NORMS (2000)

legal Sanctions in Commercial Relationships, 104 HARV. L. REV. 375 (1990)

6. Martha C. Nussbaum, Flawed Foundations: The Philosophical Critique of (a Particular Type of) Economics, 64 U. CHI. L. REV. 1197, 1214 (1997).

7. When I refer to “moral philosophy” in this Article, I am generally not referring to norma¬tive ethics—how we should behave in a particular circumstance. I am more concerned with that aspect of philosophy, also referred to as “moral philosophy,” that is “not directly concerned with the content of any particular form of moral life, whether real or imaginary, but with what the general logical rules of any morality or any moral argument . . . must be.” FLEW, supra note 4, at


One repeating pattern in the history of ideas is the attempt, futile in my view, to explain away all contingency, or on the other hand, to throw up one’s hands and conclude that the urge to explain it away, or even to see order in the chaos, is misplaced mysticism, an accident of biology, or the residue of something too spicy we ate for dinner. Un¬derstanding the persistence of contingency in all its forms, without giv¬ing up, may be the single most important thing lawyers can bring to leadership. Nevertheless, the body of American philosophy most as¬sociated with the problem of contingency, the pragmatism of William James and John Dewey (also associated with the legal pragmatism of Justice Oliver Wendell Holmes, Jr.), has been co-opted by jurispru¬dential scholars who would remove moral philosophy as a legitimate source of thought about lawyers and their place in society, much less complex commercial interactions, and replace it with what purports to be science.8

Lawmakers rely on a model of law as regulator of behavior —just as economists model the rational actor, sociologists model the relation¬ship of individuals and groups, or psychologists model the workings of the mind. Disinterested observers would likely suggest the worth of a model is its ability to predict and explain real world behavior

I will now broaden the inquiry with a philosophic assessment of the spirit and manner in which we construct and advocate the models themselves, particularly as they affect working lawyers, in the black versus white, good versus evil, us versus them of today’s political and intellectual milieu. The history of ideas is nothing if not a dialectic of faith and skepticism, experience and reason, contingency and deter¬minism, the community and the organization—all models intended to make sense of the world. Yet it is testimony to our species’ short memory or persistence that these dichotomous models are either rec¬onciled or rediscovered in every generation.

112–14. I am also seeking to obtain a better explanation of what moves us in a particular circum¬stance, and with that explanation, suggest ways to guide our practical action.

8. I have in mind the view of some within the law and economics movement that reputation, trust, and goodwill are economic goods—the value of which homo economicus may, in the course of rational calculation, seek to maximize. See, e.g., POSNER, supra note 5, at 191–92.

Professor Eric Posner emphasizes

that because sometimes a person’s principled claims will constrain his behavior, the person will cheat less often (though he will cheat if the payoff is high enough) than he would if he did not make principled claims. Therefore, claims to be principled actually may produce social benefits—by reducing the amount of cheating—even though they do not ensure or reflect principled behavior.

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The very nature of how we reason about those dichotomies has led, paradoxically, to our present incarnation of conflicting certainties. In a phrase common to lawyers—it takes very little for our reason to have us sliding down a slippery slope, whether or not there ever was a hill. Against the “either-or” to which our reason tends, leadership in law or business (and one hopes in politics) entails understanding the difference between the use of reason on one hand, and being reasona¬ble on the other. In the real and practical short run, as problem-solv¬ers and advocates, we must find answers, resolve hard cases, fire and hire, and satisfy Wall Street’s expectations. But, with apologies to Robert Louis Stevenson, as leaders and policymakers, we are ulti¬mately better off traveling hopefully than deluding ourselves that we have arrived.9 Perfectability can be worse than a myth

I do not intend to demonstrate, for example, that there are no in¬sights from economic analysis of law in the world of complex deals. Indeed, I believe it is a fundamental truth that people act in their own interest, and that as to aspects of the deal process, they are primarily rational actors. But I also believe it is a fundamental truth that some¬thing compels us to regard others with a sense of honor, obligation, and responsibility. What I will argue is that both truths are apparent on a regular basis, regardless of the governing law or rational actor economics in complex commercial arrangements. Human beings do not check at the office door their impulse to find ways to make sense of why things go wrong in the world and to impose order on the chaos—whether through contract, personal relationships, self-decep¬tion, economic analysis, or moral philosophy. Contracts are one way to deal with contingency. Submitting disputes to a judge when we dis¬agree is another. Neither is exclusive.

9. “To travel hopefully is a better thing than to arrive.” Quotations by Author, The Quota¬tions Page, available at (last visited Mar. 31, 2005).

10. As Martha Nussbaum has noted, Aristotle had only a qualified belief that conceptual thought progressed over time:

Aristotle also noticed . . . that the passion for science and simplicity frequently lead highly intelligent people into conceptual confusion and an impoverished view of the human world. So he did not think that progress was inevitable, and one of his great arguments for reading was that it could remind us of conceptual complexities we might otherwise efface, in our zeal to make life more tractable than it is.

Nussbaum, supra note 6, at 1214.


Ironically, the pragmatic impulse (like Judge Posner’s) stems from the same fully understandable aversion to absolutism that motivated Kant’s treatment of—but refusal to reject—idealism. The philosophi¬cal pragmatists (James, in particular) thought:

[T]hat the mistake most people make about beliefs is to think that a belief is true, or justified, only if it mirrors ‘the way things really are’—that (to use one of James’s most frequent targets, Huxley’s argument for agnosticism) we are justified in believing in God only if we are able to prove that God exists apart from our personal be¬lief in him.11

In the trenches where law intersects with complex business, where little is adjudicated but much is accomplished, the pragmatists are right: Permitting the dictatorship of a single idea over the use of com¬mon sense to get things done is the bane of every businessperson who

has said to a lawyer, “all you tell me is ‘no.'”12 But I argue for some

thing more. Understanding how people respond—seeing them, in Kant’s articulation, as ends and not means13—and having vision or trust when the formula of the legal documents will not suffice has value in the world, and hence is true, regardless of whether it is mea¬surable. I believe measurable and incommensurable ideas have value. It is simply a better world when we acknowledge both. Leaders we want to encourage will recognize it


12. Some law and economics scholars recognize at least the perception of the empirical obser¬vation, if not what I will suggest are its philosophical roots. One such article argues that “[t]he tension between lawyers and business people is part of the folklore. Lawyers complain that business people do not plan carefully enough against future contingencies

see also JAMES C. FREUND, ANATOMY OF A MERGER 4 n.1 (1975). Freund notes:

A recent advertisement appearing in The Wall Street Journal for a book entitled WIN

NING THROUGH INTIMIDATION contained the following text: “Have you ever had a deal

blow up solely because of an attorney? . . . [Y]ou must face the reality that attorneys have been, are, and, unfortunately, probably always will be a major obstacle in just about every significant business transaction that takes place. . . . [Y]ou must develop specific techniques . . . for protecting your flanks from the deal-killing expertise of the other side’s attorney.”


13. “[T]he fundamental principle of all maxims of action must be that the subject of all ends, i.e. the rational being himself, be never employed merely as means, but as the supreme condition restricting the use of all means, that is in every case as an end likewise.” IMMANUEL KANT, Fundamental Principles of the Metaphysics of Morals, in BASIC WRITINGS OF KANT 144, 195

(Allen W. Wood ed., 2001).

1078 DEPAUL LAW REVIEW [Vol. 54:1073

there by rejecting absolutism and focusing on real world results,14 but fails to account for that slippery and probably incommensurable thing we sense as vision or leadership.

In Part II, I summarize significant cross-disciplinary approaches to legal contingency (or uncertainty) in commercial contexts—economic and societal—and point out their implications for working lawyers. Neither economic theories of optimum risk allocation (the Coase the¬orem) nor strategic behavior are particularly helpful to dealmakers, other than in limited circumstances where rational behavior can be presumed. The law and society movement aptly characterizes the lim¬ited role of contract in commercial behavior, but offers no practical advice. I further offer philosophy, and particularly the contrasting views of Hume, Kant, and the American pragmatists (James and Dewey) as an alternative and generally disregarded discipline that may provide insight into the creative process of making a deal.

In Part III, I outline particular examples of contingency in the nego¬tiation of complex acquisitions or venture capital start-ups, and cri¬tique a prevalent view of the role of moral philosophy in the law— Richard Posner’s “pragmatic skepticism” and his rejection of the ap¬plication of any universal moral standards to the law. I also contrast that skepticism with the empirical evidence in the literature of modern business management and leadership that people do respond in viscer¬ally utilitarian environments to non-utilitarian appeals. I suggest that there are both utilitarian and non-utilitarian reasons for a return to the fashion of assessing not just the economic, but the philosophic ba¬sis of behavior. Finally, I make some normative proposals and set forth two (not so) hypothetical situations, suggesting that deal lawyers would be well served by at least studying, if not adopting, a philoso¬phy of pragmatic idealism.



A. Cross-Disciplinary Views of Contingency in

Complex Transactions

When we make a promise, or enter into a contract, we are looking forward and seeking to reduce contingency.15 I can only guess what


15. In ordinary usage, uncertainty and contingency are equivalent. The dictionary defines con¬tingency as “something whose occurrence depends on chance or uncertain conditions

unforeseen, or accidental occurrence.” WEBSTER’S NEW WORLD DICTIONARY 301 (3d Coll. ed.

1988). In this Article, I use the term “contingency” because of its philosophical connotations.


the price of wheat or the value of the Euro will be in ninety days, but when I contract with you to buy wheat or Euros, I have dealt with contingencies that might occur: Severe weather that wipes out most of the wheat crop, or an unanticipated interest rate hike by the Euro¬pean central banks.

What are the contingencies that contracts attempt to address in a complex transaction? The sale agreement for an ongoing multi-billion dollar business may contain dozens of representations and warranties (which to one degree or another must be materially true at the time of execution and closing), pre-closing covenants, conditions to closing, and post-closing covenants and indemnifications.16 Conditions to closing not in the direct control of the parties might include the ab¬sence of an injunction or restraining order, the obtaining of consents to the assignment of material contracts, licenses or permits, competi¬tion law clearances, other governmental approvals (such as foreign in¬vestment filings), securing of financing, and depending on how the clause is drafted, no material adverse change in the business itself or in conditions surrounding the business.17 In a leveraged buyout with syndicated financing, the loan agreement may typically run to a hun¬dred pages, with dozens of representations and warranties, affirmative and negative covenants, conditions to the initial closing, and subse¬quent cash advances.18

The world of start-up businesses and venture capital is almost de¬fined by contingency.19 The fundamental document in a venture capi¬tal transaction is the term sheet: It summarizes the financial and legal terms and conditions of the deal, and serves as the basis for the more complex agreements to come—for example, preferred stock terms, loan agreements, and shareholder agreements.20 The term sheet will cover the rights and duties of the entrepreneur and investor as to

16. See, e.g., Asset Purchase Agreement Dated as of February 29, 1996 Among Robert Bosch GmbH and the Other Purchasers Named Herein and AlliedSignal, Inc. and the Other Sellers Named Herein, filed with Form 8-K (Apr. 12, 1996), available at edgar/data/773840/0000773840-96-000005.txt. This deal involved AlliedSignal’s sale of the Ben¬dix brake business to Bosch for $1.5 billion. The deal involved assets in nine countries and seven states.

17. Id. at 44–46.

18. See, e.g., U.S. $36,500,000 Loan Agreement Dated as of February 2, 1990 Among Automo¬tive Plastic Technologies, Inc. as Borrower, the Lenders Named Herein as Lenders and General Electric Capital Corporation as Agent and Lender (on file with the DePaul Law Review).


NESS LAW 3 (2003) (stating that “[m]ost entrepreneurs and their backers are not risk seekers


1080 DEPAUL LAW REVIEW [Vol. 54:1073

rights, preferences, and privileges of preferred stock, liquidation pref¬erences, redemption, conversion, dilution in the event of future invest¬ment, voting, board composition and information rights, stock registration rights, rights of first refusal, stock options, and many other matters.21 As we will see, in the jargon of economists and game theo¬rists, what these transactions (and their governing contracts) have in common are repeated outcomes (the players encounter each other over and over again)22 and “insufficient[ ] state contingen[cies]” (the contracts do not completely address all of the possible future states of the world).23 The more varied and more repeated the outcomes are between beginning and end, the more risk and contingency the trans¬action will contain. The number of fixed contractual resolutions, such as redemption or conversion options in preferred stock, or deferred contractual resolutions (e.g., agreements to negotiate later in good faith, requirements of consent “not unreasonably to be withheld,” and deliberate ambiguity), are as unlimited as the ingenuity of lawyers and their clients.

1. The Law and Economics Approach a. Efficiency

The law of contracts is concerned with enforcing entitlements (le¬gally protected rights) that arise between parties that have obligated themselves to each other by promise.24 Certainly the most volumi¬nous body of scholarship within the “four corners” of contract law is the work attempting to assess contract law in light of economic the¬ory.25 One use of economic analysis is to design rules of adjudication that maximize social welfare in the event of a dispute (absent agree

21. Id. at 31–81.

22. Eggleston et al., supra note 12, at 115–19.

23. See Ian Ayres & Robert Gertner, Strategic Contractual Inefficiency and the Optimal Choice of Legal Rules, 101 YALE L.J. 729, 731 (1992).

24. See generally Jason Scott Johnston, Default Rules/Mandatory Principles: A Game Theo¬retic Analysis of Good Faith and the Contract Modification Problem, 3 S. CAL. INTERDISC. L.J. 337 (1993).

25. Any survey of this literature begins with Richard Posner’s seminal text on economic analy

sis of law, which covers far more than contracts. See generally RICHARD A. POSNER, ECONOMIC ANALYSIS OF LAW (6th ed. 2003). Posner’s law and economics approach is also evident in his influential judicial decisions, the hallmark of which is “only one primary concern—efficiency through freedom of contract.” Lawrence A. Cunningham, Cardozo and Posner: A Study in Con¬tracts, 36 WM. & MARY. L. REV. 1379, 1381 (1995). Judge Posner himself surveys the economic literature on contracts and contract law in a recent article. Richard A. Posner, The Law and Economics of Contract Interpretation, at 1 nn.2–3 (Nov. 2004), available at tract=610983. In this Article, I refer to the work of some of the most distinguished law and economics scholars writing today, such as Alan Schwartz, Robert Scott, Avery Wiener Katz, Eric A. Posner, and Richard Craswell.


ment of the parties to some other resolution). Another form of analy¬sis attempts to predict the outcome of strategic behavior or bargaining through game theory models. I believe both are instructive as to spe¬cific aspects of the dealmaking process, but neither is sufficient to ex¬plain fully how people deal (or should deal) with contingency in complex transactions because their conditions are rarely met in the real world.

i. The Coase Theorem

Ronald Coase, the 1991 Nobel Prize winner in economics, created the law and economics model by restating the way in which legal rules should address externalities, that is, costs not borne by an economic actor.26 If a manufacturer of widgets pollutes, for example, and does not bear the cost of clean-up, and the pollution imposes a cost on others, then the manufacturer may make too many widgets, all other things being equal. He may produce widgets whose total societal cost exceeds their value, and that result is inefficient.27 As to contracts, the Coase theorem says that as long as the parties involved can readily make and enforce contracts in their mutual interest, neither direct reg¬ulation nor tax impositions (to internalize the cost) are necessary to achieve an efficient outcome.28 The conditions of his theorem are as follows: (1) There are no transaction costs (i.e., any agreement that can be made will be made, and can be enforced without cost)

Economic analysis of law goes a step further and addresses the rules the law should impose in the absence of a contrary private allocation by contract. In the absence of a clear indication of the parties’ inten¬tion (which economic analysis would generally presume to militate to¬ward an efficient result), economic analysis advocates would have the liability fall on the party best able to avoid, insure against, or bear the cost .31 Thus, in the absence of an explicit risk of loss term, a seller

26. David D. Friedman, The Swedes Got It Right, at¬demic/Coase_World.html (last visited Mar. 31, 2005).

27. Id.

28. Id.

29. Id.

30. Id.

31. Id.

1082 DEPAUL LAW REVIEW [Vol. 54:1073

who had transferred title but retained the goods in its warehouse would bear the risk of a fire loss on the assumption that the seller could prevent or insure against the fire at a lower cost than the

buyer .32

Are the transaction cost conditions of the Coase theorem met in a complex deal negotiation? From one practitioner’s intuitive stand¬point, the answer is both yes and no. As to the negotiation of specific provisions, yes, the theorem has some explanatory power. Default rules do address specific externality issues that arise within the broader negotiation of the transfer or creation of a business .33 In¬deed, accepting or contracting around the way those rules allocate risk and liability is a major part of deal negotiating and lawyering. Effi¬ciency maximization, social welfare, or some other desirable function ought to play a role setting forth default obligations to third parties as between buyers and sellers of businesses, and economic analysis plays an important part in assessing whether the rules work .34 It is perfectly reasonable that default rules in these areas would be based, in the absence of other agreements between the parties, on an allocation of liability to the parties best able to avoid, bear, or insure against the socially unacceptable consequence.35 Finally, in comparison to the to

32. POSNER, supra note 25, at 96–97.

33. Just a few examples are environmental and product liability successor liability rules, state laws defining what constitutes a continuing business for the purpose of unemployment and other social benefits, post-employment benefit plan obligations under the Consolidated Omnibus Budget Reconciliation Act (COBRA), 29 U.S.C. § 1162 (2000), and workers’ compensation statutes.

34. See Cass R. Sunstein, On Philosophy and Economics, 19 QUINNIPIAC L. REV. 333, 334

(2000). Sunstein argues for a reconciliation of economists and philosophers, focusing on the ability of economic analysis to assess the efficacy of the positive or prescriptive aspects of law. Id. He defines the “prescriptive” work of economics as something less than full-fledged norma¬tive assessment of what the law should be. “Economists are . . . helpful in giving accounts of how law comes into being and in showing the best way to achieve specified ends. At the more norma¬tive level, they are most helpful in showing that if some X is the goal, some instrument Y will or will not achieve it.” Id.

35. My experience is that good deal lawyers frequently and consciously use the ability to avoid or insure against risk as a negotiation tactic. For example, buyers of businesses have distinctly different attitudes toward the allocation of risk as between onsite and offsite environmental liability. Usually, large corporations have first-rate environmental departments and are capable of doing Phase I and Phase II environmental studies on a defined piece of property. It is not unusual for the result of a negotiation to be that the seller will retain liability for known onsite problems, and the buyer will assume the risk (fully or partially) for unknown problems. This is because due diligence bounds the reasonable risk. On the other hand, offsite liability is deter¬mined under the federal superfund laws. Comprehensive Environmental Response, Compensa¬tion, and Liability Act, 42 U.S.C. §§ 9601–9675 (2000). That means that the owner of a piece of property can be responsible for contributing to the clean-up of a dump site, often miles from the purchased property, as to which there may be no onsite records or boundaries within which to conduct due diligence. Most buyer’s counsel will draw a line in the sand against the assumption of this liability. The statement in the negotiation usually goes something like: “[W]e have no


tal cost of a typical transaction (hundreds of thousands or millions of dollars in legal, accounting, economist, and other fees), negotiating any particular element of the agreement has a minimal marginal cost.

As to the deal as a whole, the answer would appear to be “no.” Among the various transaction costs detailed in the literature are bounded rationality,36 asset specificity,37 information impactedness,38 asymmetrical information distribution,39 moral hazard,40 opportu¬nism,41 and plasticity .42 Suffice it to say that all of those costs are, to a greater or lesser degree, present in any acquisition or venture capital

way of knowing where you or your predecessors took your waste offsite, you have or should have had the better opportunity to avoid this cost, and you should bear the risk, no matter upon whom the law puts the statutory liability.” Similar arguments can be, and are, made with respect to severance liability, workers’ compensation, COBRA benefits, and other costs. For further examples in the context of specific representations and warranties, see FREUND, supra note 12, at 234–80.

36. “Bounded rationality refers to human behavior that is ‘intendedly rational, but only limit


xxiv (2d ed. 1961)). “Simon observes in this connection that ‘it is only because individual human beings are limited in knowledge, foresight, skill, and time that organizations are useful instru

ments for the achievement of human purpose.'” Id. (quoting HERBERT A. SIMON, MODELS OF MAN 199 (1957)).

37. This refers to whether assets are specialized to a particular use or transaction. Categories of asset specificity are: site specificity (e.g., manufacturing assets located in close proximity to reduce inventories), physical asset specificity (e.g., specialized tools and dies), and human asset specificity (e.g., know-how). See Oliver E. Williamson, The Economics of Organization: The Transaction Cost Approach, 87 AM. J. SOC. 548, 555 (1981).

38. This “is a derivative condition that arises mainly because of uncertainty and opportunism, though bounded rationality is involved as well. It exists when true underlying circumstances relevant to the transaction, or related set of transactions, are known to one or more parties but cannot be costlessly discerned by or displayed for others.” WILLIAMSON, supra note 36, at 31.

39. Parties to a transaction have uneven access to relevant information.

40. In economic terminology, moral hazard does not have moralistic overtones. It refers to the lack of observability of contingencies and the consequence of hidden, unverifiable action within contractual relationships. Armen A. Alchian & Susan Woodward, The Firm Is Dead

ism, 26 J. ECON. LIT. 65, 68 (1988).

41. Alchian & Woodward note:

Opportunism follows from bounded rationality plus self-interest. When a conflict arises between what people want and what they have agreed to do for others, they will act in their own interest insofar as it is costly for others to know their behavior . . . . Opportunism . . . includes honest disagreements. Even when both parties recognize the genuine goodwill of the other, different but honest perceptions can lead to disputes that are costly to resolve.

Id. at 66.

42. “We call resources or investment[s] ‘plastic’ to indicate that there is a wide range of discre¬tionary, legitimate decisions within which the user may choose.” Id. at 69.

1084 DEPAUL LAW REVIEW [Vol. 54:1073

transaction .43 Accordingly, the explanatory or normative power of the theorem at that level of complexity must be limited.

ii. Incompleteness and complexity

A sampling of more recent economic analysis scholarship bearing most closely on contingent and complex business transactions demon¬strates its limitations. The primary focus of the work has been the role of the courts in supplying necessary terms of the contract that the par¬ties, for whatever reason, have omitted.

In 1992, Professors Ian Ayres and Robert Gertner demonstrated the inordinate complexity of attempting to posit particular default rules (those a court would supply in the absence of specification by the parties) in a way that would predictably maximize economic social welfare .44 They distinguished legal and economic forms of incom¬pleteness. From the standpoint of legal scholars, a contract to sell goods is “obligationally incomplete” if, in all future states of the world, a term of the obligation is missing.45 So, for example, if the contract is for the sale of widgets and neglects to specify the place of delivery, it is obligationally incomplete .46 Economists look at incom¬pleteness differently. The contract may be obligationally complete but fail to realize the potential gains from trade in all future states of the world: “These contracts are considered ‘contingently’ incomplete or ‘insufficiently state contingent.'”47 If the contract is obligationally complete (i.e., it is legally enforceable), a party may have incentives, depending on the state of the world, either to renegotiate the contract or to breach it.48

43. In these terms, there is: (1) bounded rationality because neither founders nor venture capi¬talists are fully able to predict whether a start-up technology will succeed

44. Ayres & Gertner, supra note 23, at 729.

45. Id. at 730.

46. Id.

47. Id.

48. Id. For example, see the facts in Big Horn Coal Co. v. Commonwealth Edison Co., 852 F.2d 1259 (10th Cir. 1988). There, an electric utility and a coal mine executed a long-term con¬tract for the supply of millions of tons of low-sulfur coal. Id. at 1261. The contract, made in the wake of the Arab oil embargo of the early 1970s and the passage of the Clean Air Act, was exceedingly complex, with a multi-variable price escalation clause, detailed specifications for the coal (BTU content, ash content, etc.), and a force majeure provision that called for different remedies on the happenstance of different causes of a failure of delivery. Id. at 1261–64. In the


Ayres and Gertner pointed out the difficulties in attempting to max¬imize social welfare through the imposition of contract default rules to make contracts more contingently complete. Their model is based on the default rule established in Hadley v. Baxendale:49 A carrier is only liable to a shipper for the foreseeable consequential damages of a delayed shipment .50 They concluded that, when contracting around a default is costly (for example, offering alternative contracts with range of guarantees against delay), a default rule can potentially induce inef¬ficiencies such as:

• Precaution: For shippers who would assign a low value to the shipment, a liberal consequential damages default rule would cause the carrier to spend too much to avoid delay

• Failure to deal with low-end shippers: If the default rule is set at liberal consequential damages and there is a substantial differ¬ence between high-value shippers and low-value shippers, carri¬ers may simply set a price so high that only high-value shippers will use the carrier.

• Transaction Costs: For shippers who would assign a low value to the shipment, a liberal consequential damage default would cause the carrier to spend to contract around the default rule.51

ensuing ten years after the execution of the contract, two things significantly changed the state of the world: (1) the spot price of equivalent low-sulfur coal dropped to about eight dollars per ton, compared to the then applicable contract price (after escalation) of about fifteen dollars

49. 156 Eng. Rep. 145 (1854).

50. Id. at 151.

51. Ayres & Gertner, supra note 23, at 751. The authors also conclude that there can be social welfare inefficiencies even if there is no cost to contracting around a default, particularly if there is asymmetry of information (e.g., the shipper knows how much it values prompt delivery and the carrier does not) and carrier market power. Revealing the information might prompt the carrier to take greater precautions, to contract around the default, or to charge a higher price, whether or not the carrier is able to discriminate between high- and low-value shippers with alternative contracts. Id. at 762–63.

1086 DEPAUL LAW REVIEW [Vol. 54:1073

Combined with default rules for contingently incomplete contracts, changes in other variables such as asymmetry of information and the value assigned to the contract can exacerbate social welfare inefficien¬cies .52 Moreover, as Ayres and Gertner acknowledged, even this sim¬ple hypothetical level reveals legal and economic complexity (i.e., the number of state contingencies)

Professor Robert Scott’s 2003 article studying contract indefinite¬ness uses empirical data to cast doubt on the regulatory power of pri¬vate contractual law in complex transactions. Professor Scott concludes that complex transactions will not, as often as they will, de¬pend on, or be significantly affected by, contractual default rules.54 He observes that first, many agreements “appear to be ‘deliberately’ incomplete, in the sense that the parties decline to condition perform¬ance on available, verifiable measures that could be specified in the contract at relatively low cost.” Second, he observes that this incom¬pleteness is more than a mere open term (like the transfer of risk of loss) in an otherwise complete and enforceable agreement

Recent work in experimental economics suggests . . . that the do¬main of self-enforcing contracts may be considerably larger than has been conventionally understood. A robust result of these experi¬ments is that a significant fraction of individuals behave as if reci¬procity were an important motivation (even in isolated interactions with strangers), while a comparable fraction react as if motivated entirely by self-interest. The evidence that in any population roughly half behave fairly and half behave selfishly provides the foundation for a theory of fairness grounded in the human motiva¬tion to reciprocate. Reciprocity requires no enforcement costs and also permits parties to contract over nonverifiable measures of per¬formance. Thus, this theory predicts that self-enforcement of delib

52. Id. at 733 (stating that “[i]n short, the introduction of even slight transaction costs will make the determination of efficient legal rules dramatically more difficult. We demonstrate that the behavior of contracting parties can change significantly in response to extremely small changes in other, more subtle underlying variables . . . .”).

53. Id. at 765. One assumes that building an economic model of default rules around the typical sophisticated Mergers and Acquisitions (M&A) agreement would be on a scale with mapping the human genome.

54. See generally Robert E. Scott, A Theory of Self-Enforcing Indefinite Agreements, 103

COLUM. L. REV. 1641 (2003).

55. Id. at 1642–43.


erately incomplete agreements between strangers is more efficient than the alternative of more complete, legally enforceable

contracts .56

Scott does not pretend to explain the source of the behavior of fair¬ness,57 but poses a number of interesting explanations for why sophis¬ticated parties might leave a contract incomplete .58 For purposes of this Article, I will focus only on one type, for which his hypotheses are supported by my casual empiricism: The use of legally unenforceable “comfort agreements.”59 Scott speculates that the reasons may in¬clude the parties’ desire to learn something about each other’s compe¬tence, market conditions, or the taste for reciprocal fairness.60 My experience suggests all of the above, and I suggest another—the par¬ties simply do not value judicial enforcement, even if they could have it.61

Finally, an entire paragraph near the end of Scott’s article bears repeating in its entirety, not only for its remarkable perspicacity as to the real world, but also because of its prescience to the discussion of philosophy for working lawyers that follows:

Notwithstanding the power of reciprocal fairness, contractual breakdowns nonetheless occur, in part because as the experimental evidence suggests there is both self-interest and reciprocity in the world. But given such a world, the puzzle of indefinite contracts may now be solved. Contracting parties simply may have learned to be¬have under two sets of rules: an explicit (rigid) set of rules for legal enforcement and an implicit (flexible) set of rules for self-enforce

56. Id. at 1644–45 (footnotes omitted). I contend that this is an issue fair people regularly face in dealing with unfair people. For a thoughtful treatment of the issue in negotiations, see Jonathan R. Cohen, When People Are the Means: Negotiating with Respect, 14 GEO. J. LEGAL

ETHICS 739 (2001).

57. Scott, supra note 54, at 1675 (stating that “[w]hatever the source of that behavior (whether learned, normative, or intrinsic), it is quite relevant to understanding the contracting choices of real world individuals in developed market economies who write intentionally incomplete contracts”).

58. Id. at 1675–85.

59. Id. at 1682–83.

60. Id.

61. There are many complex agreements that are really little more than glorified comfort agreements, for which parties expend huge amounts of money. The phrase in the practicing world for such a deal is “sign-and-close,” meaning that there will not be the usual delay between the execution of a definitive agreement and the closing. At the time I am writing this, for exam¬ple, we are working on a “sign-and-close” deal. By the time we close, the parties, without any enforceable contract, will have together spent hundreds of thousands of dollars in legal, account¬ing, Hart-Scott-Rodino (HSR) filing fees, due diligence, and other costs. Indeed, one of the reasons why a delayed closing after a definite agreement, the HSR filing, can be avoided is because the HSR Premerger Notification Rules permit a filing on a nonbinding letter of intent and an affidavit stating that the parties have “good faith” intent to complete the transaction. 16 C.F.R. § 803.5(a)(2) (2004).

1088 DEPAUL LAW REVIEW [Vol. 54:1073

ment. It may be that the lesson for courts is that any effort to judicialize preferences for fairness will destroy the very informality that makes reciprocity so effective in the first instance. The experi¬mental evidence suggests that the contemporary academic instinct to have courts fill gaps in incomplete contracts with broadly applica¬ble standards of reasonableness and fair treatment may actually un¬dermine the very norms of fairness that the legal system seeks to advance. If so, it is important that neither courts nor academic com¬mentators generalize about the impotency of reciprocal fairness from the litigated cases, as these disputes only arise when the im¬plicit incentives have broken down. Litigated cases, therefore, give no clue of the power of reciprocal fairness in the many situations where these social preferences may have been effective in enforcing indefinite agreements, even between strangers. Understood in the broader context of a system that relies on both legal enforcement and self-enforcement, the wisdom of the common law approach be¬comes clearer.62

As Scott recognizes, dealmakers live with contingency, but they do not necessarily invoke the law to control it.63

Professor Manuel Utset’s recent article uses economic analysis to assess how the law might address contingency in entrepreneur-venture capitalist relationships.64 He makes the following observations: (1) There is a significant divergence between the expectations of entre¬preneurs on one hand, and venture capitalists on the other

62. Scott, supra note 54, at 1691–92 (emphasis added) (footnotes omitted). Cf. Lipshaw, supra note 3, at 35 (footnotes omitted):

In the transactional world, more often than might be thought in the academic world, parties take advantage of legal principles, yet often do not take full advantage of legal rights, and their behavior is not fully a matter of risk-benefit analysis or the prediction of outcomes under well-understood legal principles. Our sense of the Golden Rule (a subset of Kant’s categorical imperative) not only provides a moral basis for avoiding false promises, but keeps us, in many cases, from requiring full victory, even when we have a basis for it.


63. For other interesting treatments of incompleteness, see Johnston, supra note 24 (discuss¬ing the impact of a good faith requirement on contract modification)

DOUGLAS G. BAIRD ET AL., GAME THEORY AND THE LAW 109–21 (1994) (applying insights of

game theory to renegotiation of incomplete contracts).

64. See generally Manuel A. Utset, Reciprocal Fairness, Strategic Behavior & Venture Survival: A Theory of Venture Capital-Financed Firms, 2002 WIS. L. REV. 45.


preneur’s very human and very intangible contribution to the venture provides extra-contractual leverage that evens the game.65 However, the extra-legal remedy available to the entrepreneur is strategic gam¬ing, which Utset contends leads to inefficient allocation of economic resources.66 His proposed solution—the legal imposition of a disclo¬sure requirement from the venture capitalist to the entrepreneur—is, as he acknowledges, not nearly as robust as his analysis of the prob¬lem.67 Indeed, the underlying assumption of the entrepreneur as ra¬tional actor whose decisionmaking might be affected by better disclosure from the venture capitalist and the complexity of the situa¬tion to be modeled calls into question the efficacy of the normative recommendations.68

Another branch of the study illuminating the role of contracts in dealing with contingency is complexity. In a widely cited article, Professors Karen Eggleston, Eric Posner, and Richard Zeckhauser de¬fine complexity along three dimensions: (1) The expected number of pay-off contingencies specified

65. See id.

66. Id. at 53, 128–46.

67. Id. at 146–47.

68. There appears to be something of an infinite regress inherent in a solution that is merely more information—particularly one that smacks of the typical disclaimers that go, for example, into an SEC registration statement for an initial public offering. While the investment bankers are selling, any securities lawyer worth her salt can draft disclosures and risk factors demonstrat¬ing that the business could never possibly succeed: “[A]ccordingly, there can be no assurance that management’s expectations will be realized.” The analog would be the venture capitalist schmoozing the entrepreneur while his lawyer gets a document with a risk factor that says: “ac¬cordingly, there can be no assurance that future conditions will not cause venture capitalist to enforce its management rights, and terminate the present officers.”

Moreover, founding entrepreneurs are variously described as “over-optimistic,” id. at 100–03, “over-confiden[t]” (indeed to the point of “blind[ness] . . . to the need for more information”), id. at 103–04, better at innovating than running a company, having “poor management skills,” lacking “business savvy,” Utset, supra note 64, at 92–93, and having “bounded rationality” (they cannot predict the future very well), id. at 114 n.228. In sum, the starry-eyed, cocky, sheltered engineer or scientist lacking people skills and a crystal ball is probably already overwhelmed with information. The regress is in trying to find that conclusive piece of information or disclo¬sure that gets through to this kind of personality.

69. See generally Eggleston et al., supra note 12. The examples the authors use are contracts for architectural services, legal services, health care, software, debt, and movie stars. Id. at 94–96. These contracts are “complex” or “simple” depending on whether they combine or sub¬stitute for fixed fees with variable fees based on time, results, or specific services intended to capture relatively complex contingent results. Id. I accept the examples of complex contracts because as I understand it, the argument is a fortiori if applied to the complex agreements I have described above.

1090 DEPAUL LAW REVIEW [Vol. 54:1073

contracts. When a contract is functionally complete, “it performs as well as it can subject to constraints on the participants’ abilities to distinguish states and the court’s ability to verify which state oc¬curred.”70 Finally, they create a four-quadrant matrix to classify those contracts that are simple or complex on one axis, and those that are functionally complete or incomplete on the other.71 Noting that econ¬omists would predict highly complex contracts, but observing empiri¬cally that contracts are simpler than the degree of uncertainty, the authors hypothesize that asymmetry of information and political and regulatory environments suggest they would be complex. The authors propose several explanations, including lack of environmental com¬plexity, negotiation costs, asymmetric information, monitoring dynam¬ics, evolutionary pressures and forms, convention, trust and reputation, judicial enforcement costs, and bounded rationality and renegotiation.72 In short, the costs and benefits of creating complex agreements, when weighed against each other, militate toward simple agreements.73

The limits of this attempt to apply science to the complexity of state contingent agreements are apparent from the normative prescriptions. The primary thrust of this analysis is to recommend a complex scheme for the hindsight review of contracts in dispute, under which a court would attempt to divine the reasons for simplicity or complexity, and then interpret the contract strictly or liberally in accordance with the formula.74 As for working lawyers, the proponents are honest enough to recognize what, charitably, might be viewed as the early stage of their analysis.75

70. Id. at 100–02. They observe that most real world contracts are not “perfectly complete.” Id. at 100.

71. Id. at 102–03.

72. Eggleston et al., supra note 12, at 104–06.

73. Id. at 107–26.

74. One can only imagine what this would look like in real world litigation over a billion dollar deal that did not work out.

75. “One normative implication of our analysis is directed to lawyers, and this is simply that more detail is not always good . . . . Complex contracts may be unnecessary when courts are sophisticated and futile when they are dull. Further research should focus on how lawyers ought to evaluate complexity when drafting contracts.” Eggleston et al., supra note 12, at 126. Even in their passing reference to the implication of the approach for working lawyers, I believe they err empirically by presuming that lawyers draft contracts (even those purporting to be legally bind¬ing) with a view solely to their interpretation by disinterested third parties. See generally Scott, supra note 54. As discussed below, I believe they err even more fundamentally if they presume that the approach for working lawyers in complex business transactions may be derived solely from a purportedly scientific model of law or economics.

Alan Schwartz and Robert Scott take a different approach to the issue of complex business contingency, although still from an ex post interpretative standpoint. They use economic analysis to demonstrate that sophisticated business firms, dealing with each other, would prefer fewer


The fact is that contracts, and hence contract theory, are limited in their ability to address contingency: “All contracts are incomplete. There are infinite states of the world and the capacities of contracting parties to condition their future performance on each possible state are finite.”76 When the empirical evidence suggests parties are as in¬fluenced by self-enforcing norms as they are by contract, even in rela¬tively simple transactions, there is a clear need to step beyond the contract to understand how and why the deal gets done.

b. Strategy

Suppose that Jones Corporation wants to sell its Widget Division. It does a discounted cash flow valuation of the business and determines that, based on its assessment of cash flows and a moderately conserva¬tive discount rate, the business is worth $500 million. Its floor, how¬ever, is $400 million because it needs that much cash to pursue an alternative investment, and because its CEO believes that selling the division for any less would appear to be a bad deal to the stock ana¬lysts, disproportionately impacting the value of Jones’ stock.

Smith Corporation is interested in buying the Widget Division. Having reviewed the offering circular financials (but without any due diligence), Smith concludes the cash flow stream, by itself, is only worth $450 million, but it will be able to provide cost synergies that increase the value to $550 million. The task will be getting a deal ne¬gotiated, not only as to price, but also as to allocation of risk. Jones suspects but does not know the amount of Smith’s synergy expecta¬tions, and Smith does not know that Jones’ cash flow projections de¬pend on the renewal, two years out, of several key contracts at price increases, something that is going to be difficult to achieve. Smith sus

default rules based on the court’s idea of fairness and more deference to the parties’ choice of risk-benefit allocation. Alan Schwartz & Robert E. Scott, Contract Theory and the Limits of Contract Law, 113 YALE L.J. 541, 608–09 (2003). They conclude, moreover, that businesses would prefer, on average, that courts attempt to divine the parties’ intent, even if it were not possible in every instance. Id. at 593–94. Finally, default rules can cause inefficiencies if the parties engage in strategic behavior based on them (possible if the parties are heterogeneous, drafting costs are finite, rules are complex, the standards are exploited to redistribute surplus, and information is asymmetric). Id. at 619.

Avery Katz’s recent work has the merit of recognizing how little impact there may be in ad¬dressing issues of contract interpretation rules to judges, legislators, and other law professors, but suffers from failing to address the possibility that even private lawmakers are not writing contracts with a view to interpretation by third parties. Often, they are writing contracts, or not writing them, or leaving them ambiguous (particularly where leaving an issue ambiguous leaves one in a better position than having it clarified), or ducking issues entirely, just to get the deal done. See Avery W. Katz, The Economics of Form and Substance in Contract Interpretation, 104

COLUM. L. REV. 496 (2004).

76. Scott, supra note 54, at 1641.

1092 DEPAUL LAW REVIEW [Vol. 54:1073

pects that there is a floor amount Jones would accept but does not know what it is.

This is a strategic game with asymmetric information. The payoffs to each party range between $400 million and $550 million. Each is capable of “bungling.” Smith could pay $550 million for a business Jones thought was only worth $500 million, and was willing to con¬sider selling for as low as $400 million. Jones could sell a business Smith thought was worth $550 million for as little as $400 million.77 Without attempting to solve this under game theory, I simply note the many possible slips ‘twixt the theoretical cup and the real world lip. In order to predict an optimum solution, game theory holds that both parties believe the other would not select a dominated strategy (i.e., one that leads to a lesser payoff under any alternative action of the other).78 In addition, when both parties are incompletely informed, the theory requires some anticipation of how a party will change its beliefs based on the other’s actions, and then select its own action consistent with that belief.79 For example, if Smith opens the bidding too high, Jones may assume that Smith thinks the business is worth more than its original valuations.80

Economic studies of strategic behavior are insightful but of rela¬tively limited use to the dealmaker. The work points out conditions under which rational parties ought to make a deal, and at what out¬come, but acknowledges the role of expectations and psychology in the process. In short, economic analysis can bring the parties to water, but it may not make them drink. This is because the empirical evi¬dence demonstrates that human beings do not always behave as ra¬tional actors. As Utset notes, “shortly after von Neumann and Morgenstern put together their expected utility model, psychologists began to gather experimental data showing that individuals tend to violate some of the expected utility axioms.”81 The studies show that people resort to rules of thumb (heuristics) rather than algorithms, and “satisfice” rather than use all information available to them.82 Moreover, “judgments are made against backgrounds that are at times ambiguous, uncertain, and vague, and at others, constructed and arbi¬trary. Our beliefs and expectations, however constructed, shape our

77. BAIRD ET AL., supra note 63, at 79–89.

78. Id. at 80.

79. Id. at 81.

80. Baird and colleagues demonstrate this with an example drawn from the negotiation be¬tween Kaspar Gutman (Sydney Greenstreet) and the Russian general Kemidov over the statue

in The Maltese Falcon. Id. at 81–83.

81. Utset, supra note 64, at 68–69.

82. Id. at 69.


preferences and thus shape our decisions.”83 Indeed, different disci¬plines—cognitive psychology, linguistics, sociology, economics—each take a different tack in analyzing the sources of our expectations.84 Finally, game theorists warn about losing sight of games within games: “Hence, before we can be sure that a simple game captures the dy¬namics of a collective action problem or any other complicated inter¬action, we must understand the extent to which it can be isolated from the context in which it arises.”85

Economic models, even game theory, do a far better job of explain¬ing the problem than helping the actors solve it. Economics can iden¬tify the Jones-Smith transaction as a “bargaining situation”—the interrelationship of conflict and the mutual interdependence of the parties—or a “bargaining context”—where two or more parties will negotiate to see if they can produce a surplus—but it cannot predict or even advise on how to accomplish the bargain.86 In my experience, the game theory archetypes, such as the Ultimatum Game or the Sab¬otage Game,87 accurately model aspects of the transaction, but offer little toward the process of getting the deal done. Dealmakers try to make deals, and doing so means confronting, often simultaneously, asymmetrical information, and otherwise irrational notions of fairness, fatigue, hidden agendas, opportunism, and unrealistic expectations. When everything is negotiated in the Smith and Jones deal, and at the eleventh hour, the two CEOs bicker over who will bear a $5 million

83. Id. at 70.

84. “[O]ne’s ‘structure of expectations’ [is] the way individuals organize knowledge about the world and use that knowledge to process new information, events and experiences.” Id. at 71. This is remarkably close to a description of what philosophy might offer, yet it is noticeably absent from most of the “scientific” literature. Our expectations are the “ought,” and what we experience is the “is.”

85. BAIRD ET AL., supra note 63, at 191.

86. Utset, supra note 64, at 72 n.84 (citing THOMAS C. SCHELLING, THE STRATEGY OF CON

FLICT 86–87 (1960))

MARKETS (1990)

87. Utset, supra note 64, at 124–28. As to the Ultimatum Game, I am thinking of many deals not made because a “take it or leave it” ultimatum is better than no deal, but it is still perceived by the CEO or board as unfair, and hence, not done. Alternatively, consider the Sabotage Game, where two competitors are negotiating a merger (assume it passes section 7 muster) and one is perceived to be negotiating unfairly. The aggrieved party might withdraw from the nego¬tiation and start a price war.

1094 DEPAUL LAW REVIEW [Vol. 54:1073

pension cost in a $500 million deal, and their respective egos refuse to allow any concession, nothing in the economic model tells the dealmaker how to bridge that gap.88

2. The Societal Approach

In 1963, Professor Stewart Macaulay published a seminal analysis of the social context of contracts in business relationships.89 Like the scholars in law and economics, Macaulay sought to challenge, against empirical observations, traditional models of the impact of contract law in society. Under that model, with the decentralization of society and the transformation of society from community to organization, the legal enforcement of promises is necessary to coerce us to honor obligations to each other. In this model, the institution of contract entails, careful planning of relationships, with all contingencies spelled out, a body of clear rules to facilitate planning, and the use of litiga¬tion (and the state’s monopoly on force) to deter breach and resolve disputes.90 As we saw in the economic analysis of law, Macaulay sought to explain the gap between this academic model and what he observed in practice: Contract planning and law were at best marginal to most business relationships. Business people, by and large, did not care about legal contracts or honor a legal approach, and dealt with contingency by alternative mechanisms: “There are business cultures defining the risks assumed in bargains, and what should be done when things go wrong.”91 Moreover, few contract disputes are litigated, and when they are, they are generally not resolved by the litigation itself.92 Macaulay described the various social mechanisms other than contract law that are employed to address and resolve business transaction


TO BARGAINING AND ARBITRATION 29 (1990)) (stating that “‘[t]he bargaining problem concerns

how to get players in a conflict to reach an agreement that is in their mutual interest when it is in each player’s individual interest to hold out for as favorable a settlement as possible'”). Non¬game theory economic analysis does not purport to prescribe for individual lawyers doing partic¬ular deals. As Richard Posner notes,

The basic assumption, that human behavior is rational, seems contradicted by the ex¬periences and observations of everyday life. The contradiction is less acute when one understands that the concept of rationality used by the economist is objective rather than subjective, so that it would not be a solecism to speak of a rational frog.

POSNER, supra note 25, at 17.

89. See generally Macaulay, Non-Contractual Relations, supra note 5. Macaulay summarized the body of his work twenty-two years later in a University of Wisconsin symposium on law, private governance, and continuing relationships. See generally Macaulay, Empirical View, supra note 5.

90. Macaulay, Empirical View, supra note 5, at 467.

91. Id.

92. Id. at 468.


contingency, particularly in view of the cost and uncertainty in the legal system itself: Social networks cutting across bureaucratic organi¬zations, reputational sanctions, acquiescence to relationships of power, exploitation, and dependence.93

The law and economics movement had a goal similar to that of the law and society movement—to liberate contract law from its narrow, formal doctrinal constraints and to place it in the real world.94 Law and economics posited a set of norms dictated by one (at least theo¬retically measurable) utilitarian standard: The maximization of social welfare.95 Ironically, Macaulay’s 1985 criticism of the limits of Willis¬tonian doctrine could just as easily apply to much of the work, almost twenty years later, of law and economics:

The contract process in action seldom is a neutral application of ab¬stract rationality. The party with the best argument as judged by a contracts professor will not necessarily win the case. An opponent with a plausible argument, little need to settle, and resources to play the lawyering game is unlikely to bow to arguments favored by law professors at elite schools . . . .

In the face of many studies challenging its descriptive accuracy, many scholars and theorists continue to paint a simple instrumental picture. What purposes are being served by all this traditional scholarly effort? Perhaps it is a form of denial. The contract system claims to be neutral and autonomous and to rest on simple rational¬ity. A descriptively accurate model of the process challenges these assumptions.96

In short, Macaulay is describing the sheer complexity of the world, one with all sorts of state contingencies. Moreover, it is a world so complex that a theorist claiming to have found the single model for dealing with business contingency is either deluded by his faith in his creation or by his view of his relationship to a deity. So where do we look when we wish to channel our cross-disciplinary impulse, at least insofar as lawyers working ex ante in complex business transactions are concerned? I believe that is a philosophical question, and so it is to philosophy I turn.

B. The Law’s Approach to Contingency in Philosophical Context

The appropriate road to understanding how working lawyers, as counselors and advisors, might deal with commercial contingency

93. Id. at 468–71.

94. See POSNER, supra note 25, at 23–28.

95. Id. at 25 (stating that “[t]he theory is that the common law is best (not perfectly) explained as a system for maximizing the wealth of society”).

96. Macaulay, Empirical View, supra note 5, at 477–78.

1096 DEPAUL LAW REVIEW [Vol. 54:1073

(apart from honing their drafting skills) follows a path already paved by philosophy. Martha Nussbaum has described how law, from Lang¬dell to Posner, has defended itself as an orderly and rational discipline through an affiliation with science.97 She observes,

Law students today very frequently learn at least some economics, since it is often claimed that this is the science (if science it is) most relevant to the understanding of the law. Far more rarely do they learn to ask questions about this whole scientific assumption and to search for alternative understandings of rigor and system. Socrates would have had some irritating questions to ask here, especially if he suspected that he was dealing with people whose confidence in their expertise outran their ability to answer questions about it.98

Having spent a career outside the ivory tower seeking to resolve contingencies on an ex ante basis, my empirical observation is that as¬piring to have science fully explain how the creative process of getting deals done is, like a second marriage, the triumph of hope over experi¬ence. Such a view does not appear to have great traction outside the legal academy, and perhaps it is time to ask why.99 The disciplines of contract theory and economics have much to offer the working law¬yer

For much of human history, and still today, people have believed there is a relationship between virtue and reward. Religion often ex¬plained why good people suffered or bad people prospered in this world: They would receive the appropriate reward or punishment in the next. At the outset of the Enlightenment, the power of reason in explaining the physical world—Newton, Copernicus, Galileo—influ

97. Martha C. Nussbaum, The Use and Abuse of Philosophy in Legal Education, 45 STAN. L. REV. 1627, 1629 (1993).

98. Id. at 1629–30.

99. See Katz, supra note 75, at 507.

100. Although the one time I called my friend and classmate, Douglas Baird, for insights on the application of game theory to a particular problem that I was facing, he simply laughed at me.

101. Nussbaum notes:

Consider Langdell’s assumption that if law is to be rational and systematic, it must be a deductive hierarchy of principles. Surely it would be relevant to look at that assump¬tion in the light of debates about method and rationality both in the philosophy of science and in moral and political philosophy. It may be that no discipline really works the way Langdell thinks science works

Nussbaum, supra note 97, at 1637 (footnote omitted).


enced some philosophers (in particular, Leibniz) to conclude that this was the best of all possible worlds.102 It would only be a matter of time until we understood all contingency—the reasons why virtue did not necessarily equate with reward.103 But that optimism diminished in the face of the cruel reality of the world, and Rousseau’s great con¬tribution was to separate the notions of natural and moral evil:104 “We are the authors of our own suffering and could be the source of our own happiness—not because God is keeping score and meting out jus¬tice, but because He has so arranged the world that such justice is part of a natural order.”105

But to understand contemporary skepticism as applied to law (ar¬gued most passionately, if not most persuasively, by Judge Posner), and its rejection of idealism, and to prepare lawyers to argue with its premises, one must understand that there is nothing new under the sun. The contemporary skeptics are not the first social philosophers to reject any notion of the metaphysical or the transcendental as ex¬planation for how we deal with the world. The great thinkers of the Enlightenment pondered and debated the contingencies and uncer¬tainties of the world—why things do not turn out as they should—and that inquiry continues to the present day.106 Immanuel Kant argued there was a permanent irresolvable contingency to the world—a per¬manent divide between the way the world is and the way our reason

102. Or as Alexander Pope’s Essay on Man described it poetically:

All Nature is but Art unknown to thee

All chance direction, which thou canst not see

And spite of Pride, in erring Reason’s spite, One truth is clear, Whatever is, is right.

Alexander Pope, Essay on Man, available at

(last visited Feb. 14, 2005).

103. NEIMAN, supra note 1, at 18–31.

104. “Recall Rousseau’s project. The idea of radically separating natural from moral evil, and calling whatever is left over the human condition, was part of a search to show that events like earthquakes were events without meaning.” Id. at 235.

105. Id. at 47.

106. As Susan Neiman observed,

The fact that the world contains neither justice nor meaning threatens our ability both to act in the world and to understand it. The demand that the world be intelligible is a demand of practical and theoretical reason, the ground of thought that philosophy is called to provide. The question of whether this is an ethical or metaphysical problem is as unimportant as it is undecidable, for in some moments it’s hard to view as a philo¬sophical problem at all. Stated with the right degree of generality, it is but unhappy description: this is our world. If that isn’t even a question, no wonder philosophy has been unable to give it an answer. Yet for most of its history, philosophy has been moved to try . . . .

Id. at 7.

1098 DEPAUL LAW REVIEW [Vol. 54:1073

tells us the world ought to be. Hegel refused to concede the gap: “The sole aim of philosophical inquiry is to eliminate the contingent.”107 Further, David Hume rejected any role at all for philosophy in ad¬dressing the issue. Our modern debates about contingency are shaped by the philosophers’ speculations.108

Before we reject idealism based in philosophy as something to be valued in a working deal lawyer, we owe ourselves at least the rigor of understanding the history of that skepticism and its counterarguments. The contingency debate invokes both skeptical and idealistic episte¬mology109 (how do we know what we know?) and skeptical and ideal¬istic morals (how do we decide the right thing to do?). And a central issue of contingency is whether our virtue relates to our well-being (utility, reward, happiness). Whether or not they recognize it, the new skeptics are heirs to a well-established history of skepticism that is powerful for picking apart any basis for idealism but hardly proposes a way to go about one’s life, either as a matter of utility or morality.110


TORY 28 (H.B. Nisbet trans., 1975) (1857)

108. This and what follows are the work of a lawyer delving into philosophy to make a point for lawyers and legal scholars, and is neither a professional summary of philosophical thought nor a history of philosophy.

109. Epistemology is the branch of knowledge concerned with how knowledge is derived. FLEW, supra note 4, at 109. Historically, on one pole are rationalists (Plato and Descartes) who contend that we can only know what is true through our reason. Id. Empiricists at the other pole (Locke and Hume) contend that we only know what is true from the experience of our senses. Id.

Understanding the difference requires understanding something about the truth-value of pro¬positions: (1) necessary propositions (those which cannot be negated)

propositions (all propositions that are not analytic). ROGER SCRUTON, MODERN PHILOSOPHY

158–59 (1995). The statement, “a bachelor is unmarried,” is analytic—it is true by definition. The proposition, “all bachelors are unhappy,” is synthetic and contingent—it is not true merely by reference to the concepts within it, and even if true, might otherwise be false. Id. at 159.

An empiricist would reject the notion that that there can be synthetic a priori truth. Those truths that are not true by definition may only be established as true by experience. Kant con¬tended otherwise, and his Critique of Pure Reason set forth the argument why, and to what extent, truth could be synthetic and a priori—i.e., derived purely by our reason, as opposed to our sensory experience. Id. at 159–62.

110. This is hardly new for skepticism. As Susan Neiman observes of the great skeptics Pierre Bayle and David Hume, “[b]oth were more interested in undermining everyone else’s conclusion than in establishing any of their own.” NEIMAN, supra note 1, at 167.


1. Precursors of the Present Philosophical Debate a. The Skepticism of Hume

The natural religion of the Enlightenment was based on what is known as the “argument from design. “111 It is an a priori argument that the order we see in the universe must be the product of some intelligent design—that is, God’s creation of a universe containing physical and moral laws, but in which God does not intervene on a daily basis.112 David Hume’s skepticism punctured the faith underly¬ing that argument.113 He rejected any role for reason in our under¬standing of the world or the determination of our moral obligations.114 His was a powerful denunciation of idealism. He offered neither epis¬temological explanation for contingency, nor a systematic ethic. Be¬cause Hume found nothing beyond the world we experience, he believed that our activities can only be directed to utility.115 His moral advice reduced in the end to a “mediocre” pragmatism.116

Hume’s goal was to approach the workings of the mind and eco¬nomics as the science of the Enlightenment had approached the work¬ings of the physical world:

But may we not hope, that philosophy, if cultivated with care, and encouraged by the attention of the public, may carry its researches still farther, and discover, at least in some degree, the secret springs and principles, by which the human mind is actuated in its opera¬tions? Astronomers had long contented themselves with proving, from the phenomena, the true motions, order, and magnitude of the heavenly bodies: Till a philosopher [Newton], at last arose, who seems, from the happiest reasoning, to have also determined the laws and forces, by which the revolutions of the planets are gov¬erned and directed. The like has been performed with regard to other parts of nature. And there is no reason to despair of equal

111. See SCRUTON, supra note 109, at 131–34.

112. A.N. WILSON, GOD’S FUNERAL 22 (1999).

113. See id. at 23–26. Martha Nussbaum has preceded me in drawing parallels between the analytical styles of Richard Posner and David Hume. See Martha C. Nussbaum, “Only Grey Matter”? Richard Posner’s Cost-Benefit Analysis of Sex, 59 U. CHI. L. REV. 1689, 1705–07 (1992)

114. NEIMAN, supra note 1, at 154–55, 167–68.

115. Susan Neiman describes Hume’s view: “[H]is very reasonable explication of the circum¬stances giving rise to the world’s evils showed that human reason leads you wrong. If you follow human reason, you expect the world to be one way. If you open your eyes, you see that it’s another.” Id. at 167.

116. “For those wishing to get about with a measure of safety . . . which instrument [experi¬ence or reason] recommends itself? The customs and habits that guided generations of mediocre but tolerable lives before you, or a compass that, fixed on an unknown object, always seems to indicate the wrong direction?” Id. at 167–68.

1100 DEPAUL LAW REVIEW [Vol. 54:1073

success in our enquiries concerning the mental powers and econ¬omy, if prosecuted with equal capacity and caution.117

Or as he stated in the introduction to his Treatise of Human Nature:

And tho’ we must endeavour to render all our principles as univer¬sal as possible, by tracing up our experiments to the utmost, and explaining all effects from the simplest and fewest causes, ’tis still certain we cannot go beyond experience

Hume’s attack on the value of moral philosophy in addressing the issues of mind and economy is unparalleled in sheer eloquence:

But this obscurity in the profound and abstract philosophy, is ob¬jected to, not only as painful and fatiguing, but as the inevitable source of uncertainty and error. Here indeed lies the justest and most plausible objection against a considerable part of metaphysics, that they are not properly a science

How then did Hume address the issue of contingency, either episte¬mologically or morally? From an epistemological standpoint, Hume concluded that reason—our ideas or our ideals—has no bearing on, or utility in, making sense of the world. Ideas are simply copies of our sense impressions.120 We can tell the difference between an idea and an experience because of its clarity: There is a difference between hav¬ing the idea of my son and seeing my son. The latter is sharp and distinct relative to the former. What we know from ideas has no im¬plications for what we experience. What we presume to know in the physical world is a presumption of cause and effect, not provable by reason, derived from the constant conjunction of certain causes and certain effects. We have never seen a billiard ball fail to move when struck by another one, so we infer the first ball striking the second caused it to move. There is no reason in logic why the second ball must move: We can imagine a world in which, having been struck, the second ball remains stationary or disappears in a puff of smoke.


118. DAVID HUME, A TREATISE ON HUMAN NATURE 44 (Ernest C. Mossner ed., 1985)


119. HUME, supra note 117, at 5–6.

120. David Hume, An Abstract of a Book Lately Published, Entitled, A Treatise of Human

Nature, &C., excerpted in THE PHILOSOPHER’S HANDBOOK 441 (Stanley Rosen ed., 2000).


So what is our basis for being able to predict that the sun will rise again, or the car will start when I turn the key? Hume’s answer is psychological disposition—”custom” or “habit.”121 Our reliance on the continued consistency of experience is a kind of natural instinct. And do we have free will, or are we subject to determinacy? Hume finds the distinction empty: Only experience, and not reason, ties ac¬tions to morality, just like the cause and effect of physical events.122 We experience the same repeated conjunctions of apparent cause and effect, and expect the future will resemble the past. What we sense as freedom is simply the absence of an external restraint. Our choices are equally determined, but we assume, merely from the continued observation of the impact of choice and its outcome, what is moral and what is not.123

But to understand Hume’s view of morality, we need to further ana¬lyze the last two sentences. If reason finds morality in the linkage of the exercise of virtue with material reward, then it is as specious as any other attempt to know anything other than by experience. In this regard, he took on the optimistic general Providence of deism: That the designs of nature prove the infinite goodness of its cause.124 To prove that the world is not what our reason would expect it ought to be if designed or operated by a good God, one need only observe the miseries, pains, and uncertainties of life. He concludes that

[t]here may four hypotheses be framed concerning the first causes of the universe: that they are endowed with perfect goodness, that they have perfect malice, that they are opposite and have both goodness and malice, that they have neither goodness nor malice. Mixed phenomena [the fact we observe both good and evil] can never prove the two former unmixed principles. And the uniform¬ity and steadiness of general laws seem to oppose the third. The fourth, therefore, seems by far the most probable.125

In the face of the randomness of good and evil as proved by experi¬ence, why be moral? As one would expect, his view of morality is that, like truth, it should be determined on the basis of experimental

121. Id. at 444.

122. Id. at 450–51.

123. Hume said,

And as there is often a constant conjunction of the actions of the will with their mo¬tives, so the inference from the one to the other is often as certain as any reasoning concerning bodies: and there is always an inference proportioned to the constancy of the conjunction. On this is founded our belief in witnesses, our credit in history, and indeed all kinds of moral evidence, and almost the whole conduct of life.

Id. at 451.


ed., 1990) (1779).

125. Id. at 122.

1102 DEPAUL LAW REVIEW [Vol. 54:1073

method, not reasoned speculation.126 Hume observes that moral judg¬ments are regularly accompanied by a sense of approval or disap¬proval that precedes the judgment.127 Hume concludes that the only common element of our sense of approval or disapproval of particular actions is utility.128 Benevolence, justice, and government only occur and are generally acknowledged to be virtuous when they have utility for us.129 None of this is the result of a priori knowledge, nor are the qualities restricted to those who happen to possess greater powers of reason:

The social virtues must, therefore, be allowed to have a natural beauty and amiableness, which, at first, antecedent to all precept or education, recommends them to the esteem of uninstructed man¬kind, and engages their affections. And as the public utility of these virtues is the chief circumstance, whence they derive their merit, it follows, that the end, which they have a tendency to promote, must be some way agreeable to us, and take hold of some natural affec¬tion. It must please, either from considerations of self-interest, or from more generous motives and regards.130

In the end, according to Hume, there is no ideal by which to set one’s course in life, except to rely on our common sense and live pragmatically:

And, in general, no course of life has such safety (for happiness is not to be dreamed of) as the temperate and moderate, which main¬tains, as far as possible, a mediocrity, and a kind of insensibility, in every thing.131

Hume’s empirical emphasis on utility influenced his friend Adam Smith and the later utilitarians like Jeremy Bentham and John Stuart Mill.132

b. The Limited Idealism of Kant

Kant sought to find a middle ground between the sharp skepticism of Hume and the pure idealism of Leibniz. In his Critique of Pure Reason, Kant argued that synthetic a priori knowledge—knowledge


man ed., 1966) (1777).

127. See id. at 65–67.

128. “In general, what praise is implied in the simple epithet useful! What reproach in the

contrary!” Id. at 12.

129. See id. at 8–45.

130. Id. at 48–49.

131. NEIMAN, supra note 1, at 166 (quoting DAVID HUME, DIALOGUES CONCERNING NATU

RAL RELIGION and Natural History of Religion 184 (J.C.A. Gaskin ed., 1993)).

132. See generally JOHN STUART MILL, UTILITARIANISM (1861), excerpted in PHILOSOPHY: BASIC READINGS 99–103 (Nigel Warburton ed., 1999)


accessible to us only through reason and not experience—was possi¬ble.133 Indeed, his argument was that such a priori knowledge was necessary even for a skeptic like Hume to pose the question “how do we know?”134 But Kant reached a surprisingly nuanced conclusion: The only things we can judge to be true are those which, in the first instance, are the subjects of our experience (or possible experi¬ence).135 The way we perceive that experience is shaped by certain concepts, which together constitute our understanding that we simply could not have acquired from experience, such as unity, causation, substance, and plurality.136 In short, in the first part of the Critique of Pure Reason, Kant deduces that, subjectively, we are able to order and explain our experience only with an already ingrained take on the world. Moreover, he deduces that there is objective knowledge: We observe a world that can be other than it seems to us, and which exists independently of our perspective on it.137 Kant rejects the pure ideal¬istic notion that everything happens for a reason—that there is either a specific or a general Providence knowable to us objectively.138 But in the world of experience, there is an objective law of causality. As to empirical events in time and space, everything that happens is bound by cause and effect.139

Kant’s application of his metaphysics to morality is important to understand in responding to the skeptical view and is the subject of his Critique of Practical Reason.140 Kant’s basic metaphysical distinction is that in practical matters, reason is capable of letting us decide what we ought to do—it makes no claims as to truth or falsity.141 As to the assessment of truth, reason that takes us beyond experience or possi¬ble experience is “pure.”142 It seeks unconditioned knowledge of the world—to view the world from a point of view other than that of the observer.143 And pure reason, detached from experience or possible experience, can make no claims of truth about the objective world.144

133. See generally IMMANUEL KANT, Selections from Critique of Pure Reason, in BASIC WRIT¬INGS OF KANT 1 (Allen W. Wood ed., 2001).

134. See id. at 35–38.

135. Id. at 3.

136. Kant called these “categories.” Id. at 57–59.

137. Id. at 60–87.

138. Id. at 19.

139. KANT, supra note , at 82–83.

140. See generally IMMANUEL KANT, Selections from Critique of Practical Reason, in BASIC WRITINGS OF KANT 223 (Allen W. Wood ed., 2001).

141. Id. at 225–26.

142. KANT, supra note 133, at 6.

143. Id. at 13–14.

144. See id.

1104 DEPAUL LAW REVIEW [Vol. 54:1073

As to morality, Kant rejects the notion that we are merely slaves to the cause and effect of the physical world, and the basis of this rejec¬tion is the role of our reason in helping us determine what we ought to do.145 We are physical beings subject to the natural world of cause and effect, of hunger and desire, of greed and fear, and at the same time, we are free and autonomous moral agents with the power to will an end, whether or not it is in our self-interest.146 As one writer de¬scribes it:

Of all [intentional] actions the question can be asked: Why do that? This question asks not for a cause or explanation, but for a reason. Suppose someone asks me why I struck an old man in the street. The answer ‘Because electrical impulses from my brain precipitated muscular contractions, and this resulted in my hand making contact with his head’ would be absurd and impertinent, however accurate as a causal explanation. The answer ‘Because he annoyed me’ may be inadequate in that it gives no good reason, but it is certainly not absurd. Reasons are designed to justify action, and not primarily to explain it. They refer to the grounds of an action, the premises from which an agent may conclude what to do.147

This is no mere historical point. There is, in relatively recent schol¬arly literature on contract default rules, a debate that arises out of confusion over this very issue. Professor Charles Fried is an heir to Kant when he characterizes contract as a subset of promise, and sees its moral basis in our power, by our will, to intervene in and change the course of, the world of cause and effect.148 Fried uses practical reason to access a moral law we should accept universally—we honor our promises: “The obligation to keep a promise is grounded not in arguments of utility but in respect for individual autonomy and in trust.”149

In his oft-cited criticism of Fried’s autonomy theory, Richard Cras¬well argues that the moral basis for promising does not provide any coherent basis for determining how to resolve incompleteness issues with default rules.150 Without my expressing a view on whether Fried

145. KANT, supra note 13, at 203.

146. “The positive concept of freedom furnishes this . . . cognition, which cannot, as with physical causes, be the nature of the sensible world (in the concept of which we find conjoined the concept of something in relation as cause to something else as effect).” Id. at 204.

147. Roger Scruton, Kant, in GERMAN PHILOSOPHERS 1, 69–70 (Keith Thomas ed., 1997).

148. CHARLES FRIED, CONTRACT AS PROMISE 7–8 (1981). For another view on why we con

sider the law to bind us, see Rex J. Zedalis, On First Considering Whether Law Binds, 69 IND. L.J. 137 (1993).

149. FRIED, supra note 148, at 16.

150. Richard Craswell, Contract Law, Default Rules, and the Philosophy of Promising, 88

MICH. L. REV. 489, 517–24 (1989).


or Craswell has the better of it on default rules,151 there is little ques¬tion that Fried has a better handle on the philosophical context—har¬monizing both the moral and utilitarian aspects in Kantian fashion:

There is . . . a version of rule-utilitarianism that makes a great deal of sense. In this version the utilitarian does not instruct us what our individual moral obligations are but rather instructs legislators what the best rules are. If legislation is our focus, then the contradictions of rule-utilitarianism do not arise, since we are instructing those whose decisions can only take the form of issuing rules. From that perspective there is obvious utility to rules establishing and enforc¬ing promissory obligations. Since I am concerned now with the question of individual obligation, that is, moral obligation, this legis¬lative perspective on the argument is not available to me.152

The frustration with accepting Kant’s enduring dualism between the transcendental “ought” and the real world “is,” captured in the ex¬change between Fried and Craswell, is the basis for much of the phi¬losophy that followed Kant. Some, expressed most thoroughly and vividly by Hegel, took the view that there was no dualism and hence, no contingency

2. Pragmatism

Pragmatism is a classification under which falls the thinking of a number of influential American thinkers spanning the turn of the twentieth century—William James, John Dewey, Charles Peirce, and Justice Holmes—as well as contemporary thinkers such as Richard Rorty. It responds to the gap between the “is” and the “ought” by concluding it is a problem beyond our ability to solve. Although it is

151. Indeed, the point of this Article is that the role of courts or legislatures in setting default rules is of more concern in scholarly debates among law professors than it is in the world of deal lawyers. Nevertheless, I have argued elsewhere that contracts qua contracts are not moral in¬struments. Jeffrey M. Lipshaw, Duty and Consequence: A Non-Conflating Theory of Promise and Contract, available at (last visited Mar. 11, 2005).

152. FRIED, supra note 148, at 16. For what it is worth, Kant would have probably opted for formalism over substance in the interpretation of contracts, consistent with his view that the practical world should consist of positive law. See Jeremy Waldron, Kant’s Legal Positivism, 109

HARV. L. REV. 1535, 1545 (1996). Waldron states:

The premise of Kant’s account is that, in the absence of legal authority, we must expect that individuals will disagree about right and justice and that this disagreement will lead to violent conflict. The task of the legislator is to put an end to this conflict by replacing individual judgments with the authoritative determinations of positive law.

Id. at 1545.

153. The philosophy of Hegel is not directly relevant to my thesis, and I leave it for profes¬sional historians of philosophy. See NEIMAN, supra note 1, at 84–103

GERMAN PHILOSOPHERS 105 (Keith Thomas ed., 1997).

1106 DEPAUL LAW REVIEW [Vol. 54:1073

difficult to capture all of the variants of pragmatic thought in a few sentences, common denominators are beliefs that: (1) Ideas do not necessarily reflect the world as it is

A pragmatist turns his back resolutely and once for all upon a lot of inveterate habits dear to professional philosophers. He turns away from abstraction and insufficiency, from verbal solutions, from bad a priori reasons, from fixed principles, closed systems, and pre¬tended absolutes and origins. He turns toward concreteness and ad¬equacy, towards facts, towards action and towards power. That means the empiricist temper regnant and the rationalist temper sin¬cerely given up. It means the open air and possibilities of nature, as against dogma, artificiality, and the pretence of finality in truth.157

Like philosophers before them, the pragmatic thinkers wrestled with the issue of contingency. John Dewey described the world as fearful, awful, precarious, and perilous.158 He further wrote, “The striving to make stability of meaning prevail over the instability of events is the main task of intelligent human effort.”159 But Dewey saw the resolution of contingencies not in philosophical speculation, but in the work of science:

[T]he things of ordinary experience contain within themselves a mixture of the perilous and uncertain with the settled and uniform. The need for security compels men to fasten upon the regular in order to minimize and to control the precarious and fluctuating. In actual experience this is a practical enterprise, made possible by knowledge of the recurrent and stable, of facts and laws. Philoso¬phies have too often tried to forego the actual work that is involved in penetrating the true nature of experience, by setting up a purely theoretical security and certainty. The influence of this attempt upon the traditional philosophic preference for unity, permanence,


We need to make a distinction between the claim that the world is out there and the claim that the truth is out there. To say that the world is out there, that it is not our creation, is to say, with common sense, that most things in space and time are the effects of causes which do not include human mental states. To say that truth is not out there is simply to say that where there are no sentences there is no truth, that sentences are elements of human languages, and that human languages are human creations.


155. MENAND, supra note 11, at 356.


(John J. McDermott ed., 1977).

157. Id.

158. DEWEY, supra note 2, at 42.

159. Id. at 50.


universals, over plurality, change and particulars is pointed out, as well as its effect in creating the traditional notion of substance, now undermined by physical science.160

How did (and does) pragmatism suggest we deal with issues of con¬tingency and morality? What is clear is it is not by an appeal to any kind of idealism. The essence of pragmatism is its lack of adherence to any particular dogma

160. Id. at iii–iv. This passage, written in 1929, speaks volumes about Dewey’s linkage of Kant and Hegel to the scientific discoveries of the early twentieth century. Dewey studied Kant and Hegel at Johns Hopkins, and was particularly influenced by Hegel’s philosophy of history. MENAND, supra note 11, at 261–72. Dewey could be characterized as

a serious person, too. He wasn’t interested in philosophy as a form of mental exercise. He was interested in it as a guide to living, and Hegel turned out to be just what he was looking for. Hegel’s philosophy made a much closer corollary to Huxley’s picture of the body as an integrated organism than Torrey’s attenuated Kantianism had.

Id. at 266.

Dewey is thus clearly referring to Hegel’s “elimination of the contingent” when he describes philosophies of theoretical security and certainty. See DEWEY, supra note 2, at 50. It would also appear that he is referring to Kant, particularly as to substance, which Kant includes as one of the a priori categories by which our minds organize the world. KANT, supra note 133, at 59. Moreover, there can be little doubt about the notions of substance being undermined by physical

science at the time. Max Planck first proposed quantum theory in 1900. TIMOTHY FERRIS, COM¬ING OF AGE IN THE MILKY WAY 286 (1988). In 1927, Werner Heisenberg announced the inde

terminacy principle, that the very act of observing makes it so we can either know the positon of a particle or its trajectory, but not both. Id. Quantum physics undermined the very cause and effect at the heart of classical physics:

Classical physics was deterministic: If A, then B

Id. at 290. In short, science was undermining not just prior science, but the a priori assumptions of philosophers on matters as basic as substance and causation. No wonder, then, that Dewey, writing in 1929, might be inclined to reject philosophic speculation about the fundamental nature of the world in favor of a pragmatic thought.

161. Dewey stated:

The facts of the ungoing, unfinished and ambiguously potential world give point and poignancy to the search for absolutes and finalities. Then when philosophers have hit in reflection upon a thing which is stably good in quality and hence worthy of persistent and continued choice, they hesitate, and withdraw from the effort and struggle that choice demands:—namely, from the effort to give it some such stability in observed existence as it possesses in quality when thought of. Thus it becomes a refuge, an asy¬lum for contemplation, or a theme for dialectical elaboration, instead of an ideal to inspire and guide conduct.

DEWEY, supra note 2, at 53.

1108 DEPAUL LAW REVIEW [Vol. 54:1073

to avoid the dangers of philosophic contemplation of truth (with its inherent tendency to find absolutes and extremes), and simply act in this world to make things better.162 Approaching contingency solely through reason explains but does no more

In 1891, James spoke similarly of the role of idealistic philosophy to morals:

[Intuitional or idealist thinkers] deserve credit for keeping most clearly to the psychological facts. They do much to spoil this merit on the whole, however, by mixing it with that dogmatic temper which, by absolute distinctions and unconditional ‘thou shalt nots,’ changes a growing, elastic, and continuous life into a superstitious system of relics and dead bones. . . . There is but one unconditional commandment, which is that we should seek incessantly, with fear and trembling, so to vote and act as to bring about the very largest total universe of good which we can see.165

162. See id. at 52–77.

163. Id. at 52 (stating that “[t]he consequence [of pure metaphysics] is that conversion of unavowed morals or wisdom into cosmology, and into a metaphysics of nature, which was termed in the last chapter the philosophic fallacy”).

164. Id. at 70. This same point served as the basis for Dewey’s educational philosophy: [T]he difference in abstract principles will not decide the way in which the moral and intellectual preference involved shall be worked out in practice . . . . I take it that the fundamental unity of the newer philosophy is found in the idea that there is an intimate and necessary relation between the processes of actual experience and education.


165. WILLIAM JAMES, The Moral Philosopher and the Moral Life, in THE WRITINGS OF WIL

LIAM JAMES, supra note 156, at 625–26. As noted in MENAND, supra note 11 and accompanying

text, James viewed the question of whether a particular belief was justified as one distinct from whether it was true. Among those characterized as pragmatists, there is a wide divergence of views on the utility of beliefs. Richard Rorty, for example, argues that our beliefs are the prod¬uct of our language and culture, and hence themselves are contingent on changes in language and culture from one period to the next. See RORTY, supra note 154. Hence, he claims that the recognition of that contingency is the chief virtue of a liberal society in which metaphysical needs have disappeared. Id. Compare this to Dewey’s view of the role of ideals in experience, quoted partially as the introduction to the Article:

A particular ideal may be an illusion, but having ideals is no illusion. It embodies features of existence. Although imagination is often fantastic it is also an organ of nature

DEWEY, supra note 2, at 62.


With this brief grounding in the philosophy of utility, morality, and contingency, we turn finally to its expression in the current literature of the law and how it might impact the lawyer working ex ante to get deals done.


A. The Mix of Contractual and Non-Contractual Contingencies

in Complex Transactions

In Part II.A, I touched on the sheer complexity of contracts used in complex business transactions. I concur, however, with the sociologi¬cal observations that the role of the law in such transactions is hardly as central as either the lawyers or legal scholars might presume it to be. It would be disingenuous to suggest that the power of the state to enforce adjudicated contract rights has no consequence. But contracts create moral markers as much as legal rights and duties. The real world of M&A work or the creation of a high technology business cannot be modeled by solely legal or even economic rules. There is too much contingency and too broad a range of conceivable outcomes. For the uninitiated, what follows is a brief and anecdotal sense of the non-legal contingencies, those not addressed by traditional law and economics models of contract, faced by participants (including law¬yers) in those worlds.166

1. Contingency in Mergers and Acquisitions

The deal that resulted in the famous Texaco-Pennzoil litigation not only demonstrates the matrix of legal and non-legal contingency that

166. I focus on these two areas because they are the ones with which I have the most experi¬ence. Lisa Bernstein has studied a series of other complex and close-knit business communities, focusing on the legal and extra-legal norms by which they deal with the contingencies of their businesses. See, e.g., Lisa Bernstein, Opting Out of the Legal System: Extra-Contractual Rela

tions in the Diamond Industry, 21 J. LEGAL STUD. 115 (1992).

The complexity of the role of extra-legal norms, including the so-called incommensurability thesis, has long been the subject of debate among legal scholars. Professor Sunstein wrote the seminal work, arguing that there is a theory of choice among a range of incommensurable values and options that can account for people’s social behavior. See generally Cass R. Sunstein, In¬commensurability and Valuation in Law, 92 MICH. L. REV. 779 (1994). Eric Posner argues, on the other hand, that we may observe what looks like incommensurability, but it is a mistake to assume that this is based on values, as opposed to rational calculation of economic or reputa¬tional gain. POSNER, supra note 5, at 185–202. Posner takes a game theoretical approach to non¬legal norms, arguing that being perceived by others as a good type is instrumental—it furthers our interests—and a good type, in the course of the game, engages in “signaling” to the other players that he or she is in fact a good type. Id. at 18–27. I obviously weigh in on the Sunstein side of the debate, and I believe that the anecdotes in the next section provide at least some support for that argument.

1110 DEPAUL LAW REVIEW [Vol. 54:1073

acquisitions lawyers and dealmakers face, but also the danger of thinking about contingency only as a lawyer might. Texaco acquired Getty Oil in 1983. Two years later, a state court jury in Houston awarded Pennzoil, the outbid suitor, breach of contract damages in excess of $7 billion and punitive damages in excess of $3 billion on a contract that had never been signed.167

In the early 1980s, effective control of Getty Oil, a public company, resided in two parties: Gordon Getty, the intellectual son of J. Paul Getty, and the board of trustees of the J. Paul Getty Museum.168 Through family trusts, Getty controlled forty percent, and the mu¬seum owned twelve percent of the common stock of Getty Oil.169 Without getting into the myriad details of motivating factors,170 over the several days following New Year’s Day 1983, Getty Oil was on the brink of being sold to Pennzoil.171

The negotiations culminated in a twenty-five hour session on Janu¬ary 3 and 4, 1983. Liedtke had offered $100 per share for Getty Oil, and, unknown to the Getty Oil board, had privately executed a short memorandum of agreement with Gordon Getty for his support of the sale at that price, and his commitment to urge the museum to do the same.172 In exchange, Getty would be the chairman of the merged company.173 The museum, represented by Lipton, separately negoti¬ated an additional $10 per share.174 All of this was presented to the Getty Oil board of directors, most of whom believed the company was undervalued at either $100 or $110, with a time limit under which the offer would be withdrawn if not accepted before the board meeting was adjourned.175


This may be the single best book about deals and litigation I have ever read. Its size, fact situa¬tion, and outcome are pathological, but almost every deal lawyer can identify with the whirl of events, adrenaline rush, and confusion. All litigators should read the first half to understand the dynamics of dealmaking, and all transactional lawyers should read the second half to understand how what they do, legally and non-legally, can be perceived by ordinary people.

168. Id. at 88.

169. Id.

170. See id. at 13–154 (e.g., the dysfunctional Getty family, Gordon Getty’s unsuitability to run the company, the “eat or be eaten” acquisition craze in the oil business in the early 1980s, the mercurial and acquisitive chairman of Pennzoil, Hugh “Chairman Mao” Liedtke).

171. Id. at 158.

172. PETZINGER, supra note 167, at 161. R

173. Id.

174. Id.

175. Petzinger recorded the director’s reaction to the offer and the deadline as follows:

This is blackmail! many of the directors thought.

Henry Wendt [a director] was convinced that Gordon was selling the public share¬holders down the river simply to achieve a long-coveted ambition to become chairman


During the meeting, the Getty board pressured Getty to negotiate an additional $10 to bring the price to $120 per share, arguing that although Salomon Brothers may have assured the museum $110 was fair (on only two days’ study), Goldman Sachs had not done the same for the public shareholders, whom the Getty board represented.176 Only then did Gordon Getty reveal his private agreement with Liedtke, and there was rancorous fallout among the directors.177 As the board meeting continued through the early morning hours, Lip¬ton, representing the museum and sensing that the deal was falling apart, suggested to the Getty Oil board that it consider going back to Pennzoil with a creative structure of cash and debentures valued at $120.178 The Getty board approved this at 2:30 a.m., and the invest¬ment bankers prepared a handwritten letter, which was left with the Pennzoil banker at 4:30 a.m.179

The next day, before the Getty board reconvened at 3:00 p.m., Liedtke and Pennzoil’s team, including its lawyer, Arthur Liman, made a complex counteroffer at either $110 a share, or $90 per share plus the proceeds of a spin-off of a Getty subsidiary that would be completed after the sale.180 Lipton told Liman “It won’t sell . . . It’s too cute.”181 Liman went back to Liedtke and secured authority to bump the value of an offer up to $111.50.182 Lipton asked Liman to make it $112.50.183 Liman said he would not go back to Liedtke with

of the board. “Do you know what this company is worth?” he demanded. “Have you tried to shop the company?”

“I’ve considered and rejected many things,” Gordon calmly answered. “This ap¬proach is best.” Another recess, during which the finger sandwiches and little weenies came in.

Dr. Laforce of UCLA [a director] resented the whole thing. “We’re being placed in a position of having to make a decision in three or four hours on a take-it-or-leave-it basis,” he said. “This involves enormous sums of money and some complex issues. Why was this proposal structured to be withdrawn if it wasn’t accepted right now?”

“In the terms of the trade,” explained Boisi of Goldman, Sachs, “Pennzoil is using a ‘bear hug.’ They’re using speed and pressure to get a good deal for themselves. That’s the tactical reason for putting a deadline on the deal.”

Id. at 174–75.

176. Id. at 177.

177. Id. at 179–80.

178. PETZINGER, supra note 167, at 180. R

179. Id. at 181–82.

180. Id. at 186.

181. Id.

182. Id. at 187.

183. Id.

1112 DEPAUL LAW REVIEW [Vol. 54:1073

out a firm deal.184 Lipton agreed to seek the Getty board’s approval.185

Liman waited while the board listened to Lipton, the lawyer for the museum and a twelve percent shareholder, present the $112.50 of¬fer.186 After a raucous three-hour session that pitted the Getty direc¬tors against their own investment bankers (who would not call the offer fair), the board approved a $112.50 sale of the company by a 15–1 vote.187 Liman testified later that the “doors flew open,” and he heard from either Lipton or Martin Siegel, Gordon Getty’s invest¬ment banker, “Congratulations, Arthur, you’ve got yourself a deal.”188 Whether many hands were shaken was later a matter of dispute.189

But no document was signed. In the next two days, Bruce Wasser¬stein, then at First Boston, contacted Lipton and eventually engi¬neered the deal in which Texaco trumped Pennzoil and acquired Getty Oil for $125 per share, and the litigation ensued.190

The centrality (or lack thereof) of law as the means by which con¬tingency is addressed in a transaction, at least as perceived by nonlawyers, is evident from the account of Lipton’s cross-examination (by Joe Jamail) on the question of whether he and Arthur Liman had a deal. Lipton had testified on direct examination to the effect that there could not have been a binding deal as of the conclusion of the board meeting because “in his opinion Gordon could never have com¬pleted the Pennzoil deal without hiring lawyers who specialized in complex oil-and-gas transactions.”191 The following examination ensued:

“Are you saying that two people cannot agree unless they hire a bunch of lawyers to tell them they’ve agreed?” Jamail demanded.

“I’m not saying that at all, Mr. Jamail. I’m saying that two people who are contemplating an agreement with respect to a ten-billion¬dollar transaction would be awfully foolish to do it on the basis of an outline and the absence of an expert’s advice . . . .”

Jamail knew what he wanted.

“Mr. Lipton,” he said, glaring, “are you saying that you have some distinction between just us ordinary people making contracts with each other, and whether or not it’s a ten-billion-dollar deal? Is there a different standard in your mind?”

184. PETZINGER, supra note 167, at 187.

185. Id.

186. Id. at 188.

187. Id. at 191.

188. Id. at 192.

189. Id. at 186–93.

190. PETZINGER, supra note 167, at 193–234.

191. Id. at 371.


“Yes, indeed.”

“At that point,” juror Jim Shannon would recall, “my jaw just dropped.”

Jamail waited a full five seconds to let the response sink in. “Oh,” Jamail said. “I see.”

“So if it wasn’t a bunch of money involved in this Getty-Pennzoil transaction, it could be an agreement?”

“Well, if there was five or ten dollars involved, I guess you might say that.”

In fact, Lipton was articulating a legal principle codified in 17th century England and known as the Statute of Frauds, which held that complex transactions of great size or complexity do impose a higher degree of agreement. But as far as the jury was concerned, Marty Lipton had just made honor in business contingent on the number of dollars involved.192

When Martin Lipton got the call from Bruce Wasserstein, he used his lawyer’s model of contracts and contingency to conclude that there was no deal.193 As the jury verdict proved, the public did not necessa¬rily agree.

James Freund, one of the great M&A lawyers (and one of the best and most prolific theorists, raconteurs, and authors on the subject of getting deals done) described the relationship of legal and non-legal skills in negotiating a complex merger:

Unlike a work on abstract legal principles or such related practical matters as structuring a merger, as to which there are certain objec¬tive criteria for judgment, this subject often boils down simply to a matter of “feel,” based on experience—as to where, for example, a particular line can and should be drawn, to compromise opposing viewpoints while adequately protecting each of the parties. Other practitioners would undoubtedly take different stands on specific matters, and needless to say, each reader is encouraged to seek his own level. There is no “right” position on, or solution to, the typical negotiating problem. To achieve workable compromises and con¬summate deals, you must dismiss all rigid postures from your mind

192. Id. at 371. Compare this story to the assessment of the role of the U.C.C. Statute of Frauds in a model that assumes people are rational actors, and whether judicial approaches to its application impact behaviors. See generally Eric A. Posner, Norms, Formalities and the Statute of Frauds: A Comment, 144 U. PA. L. REV. 1971 (1996). Getty Oil and Pennzoil did not have a signed writing, definitive or not, because: (1) At least one side believed its handshake was its bond

PETZINGER, supra note 167, at 191–99.

193. Id. at 202.

1114 DEPAUL LAW REVIEW [Vol. 54:1073

and roll with the punches, adapting yourself to the situation and your opposite number. . . .

There is a great intermeshing of disciplines in connection with a merger negotiation. My experience is that everyone else involved— accountants, businessmen, investment bankers—contribute ideas that could be termed “legal,” while the lawyer himself is frequently pointing out considerations that could be considered “accounting” or “business” or “financial.” If there is to be real teamwork, it is important that everyone concerned have an inkling of what is going on in the lawyer’s mind in connection with making a deal.194

Freund’s point is the same one raised in the outset of this Article, and is not a legal or economic question, but one of philosophy. How, in the face of great contingency, legal and otherwise, do we decide when to be rigid, to hold to our view of the world as it ought to be, or flexible, to conclude that the world as it is may be alright? How do we gather the psychic energy to find the creativity to bridge gaps between the parties, or do we simply accept the fact that there is a gap and go home?

2. Contingency in Start-ups and Venture Capital

There are massive contingencies in starting a business and funding it with venture capital financing, but almost none of them (save patent protection) are addressable by law. As Freund described for mergers, there are basic start-up structures as to which there are almost objec¬tive criteria, involving the ratio of the funds invested to fully diluted equity position in convertible preferred stock, or straight preferred with equity warrants.195 In addition, there are relatively standard liq¬uidation preferences, anti-dilution, and other rights.196 Negotiation occurs largely along the kinds of complexity axes described earlier.197

One venture capitalist’s conception of the contingency he faces in investing is merely a restatement of the gap between the “is” and “ought.” Thus, “In an ideal world, all of the firm’s investments would be winners. But the world isn’t ideal

194. FREUND, supra note 12, at 2, 4–5.

195. Bob Zider, How Venture Capital Works, HARV. BUS. REV., Nov.–Dec. 1998, at 131, 134.

196. Joseph B. Hoffman & Richard G. Chisholm, Trends in Venture Capital Financing Terms,


197. See Eggleston et al., supra note 12 and accompanying text.

198. Zider, supra note 195, at 136.


petitors behaving as expected, customers wanting the product, pricing forecast correctly, and patents being issued and enforceable. Assum¬ing that these are independent events, the failure of any single factor means the failure of the company, and even in the best companies the odds are only four to one (eighty percent) on each factor, then the best probability of success is about seventeen percent.199

In their study of law firms in Silicon Valley, Mark Suchman and Mia Cahill directly addressed the nature of transactional uncertainty and the rational actor model.200 They distinguish “risk”—the probabilistic uncertainty within a known range of options and outcomes—from un¬bounded “uncertainty”—when neither the full range of options nor the relative probability of alternative outcomes can be known.201

Unlike risk, uncertainty is deeply incompatible with the neoclassical model of fully rational decision-making. Instead of producing a careful expected-utility analysis of all lines of action, conditions of uncertainty tend to produce “boundedly rational” decision strate¬gies, involving “good enough” choices, gut feelings, and rules of thumb. At a more macroscopic level, uncertainty elevates transac¬tion costs and exacerbates intra-organizational strains and power struggles. Consequently, unresolved uncertainty poses a fundamen¬tal cognitive and organizational obstacle to the formation and main¬tenance of stable markets for high-technology start-up capital.202

As we will see, the contribution of lawyers in this environment is sig¬nificantly different than the predictors of possible ex post interpreta¬tions of their agreements. They are contributors to the creative process—helping to bring their clients a little closer to the ideal world where companies do not fail .203

3. The Question that Derives from the Empirical Observation

Having reviewed the theoretical limitations of the private law of contracts and the rational actor model to take account of very com¬plex state contingencies, and having observed transactional complex¬ity, of which legal uncertainty is merely a subset of total uncertainty, to what discipline may legal scholars and practitioners turn for expla

199. Id. For other sources helpful in getting a sense of the breadth of contingency not ad

dressable by law, see BAGLEY & DAUCHY, supra note 19, at 1–8



lem Hulsink, Networks in Entrepreneurship (May 2001), available at 0887.

200. Mark C. Suchman & Mia L. Cahill, The Hired Gun as a Facilitator: Lawyers and the Suppression of Business Disputes in Silicon Valley, 21 LAW & SOC. INQUIRY 679 (1996).

201. Id. at 688–89.

202. Id. at 689 (footnotes omitted).

203. See infra Part III.C.2.

1116 DEPAUL LAW REVIEW [Vol. 54:1073

nation and guidance? In the following sections, I review two pro¬posed approaches suggested by my earlier summary of moral philosophy, legal pragmatism (moderate and Posnerian) and the lim¬ited idealism of Kant.

B. A Critique of the New Orthodoxies

We can trace the modern legal pragmatism of Judge Posner and others back to the American pragmatists of the late nineteenth cen¬tury. Justice Holmes was a contemporary, correspondent, and col¬league of James and Dewey, and his philosophy of law reflected a shared pragmatism.204 Justice Holmes’s The Path of the Law is as firm as the writing of Dewey and James in holding experience above ab¬stract ideals in determining what the law should be .205

There are two primary ironies in the fact that the self-styled heirs to Justice Holmes reject any role for philosophy in the understanding of contingency. The first is apparent from internecine debates among the legal pragmatists themselves. Those radical pragmatist skeptics, like Judge Posner, who are so firmly wedded to the scientifically de¬rived laws of economics as the one true determinant of human interac¬tion and welfare, are viewed by their more moderate brethren as icons of the very dogmatism that the original pragmatists deplored.206 The

204. For an entertaining history of this relationship, see MENAND, supra note 11, at 3–69. R Menand observes that Holmes’s particular aversion to absolutism was shaped by his experience as a young officer in the Civil War.

205. Oliver Wendall Holmes, The Path of the Law After One Hundred Years, 110 HARV. L.

REV. 991, 998 (1997), originally published, 10 HARV. L. REV. 457 (1897). Holmes wrote:

The language of judicial decision is mainly the language of logic. And the logical method and form flatter that longing for certainty and for repose which is in every human mind. But certainty generally is illusion, and repose is not the destiny of man. Behind the logical form lies a judgment as to the relative worth and importance of competing legislative grounds, often an inarticulate and unconscious judgment, it is true, and yet the very root and nerve of the whole proceeding. You can give any con¬clusion a logical form. You always can imply a condition in a contract. But why do you imply it? It is because of some belief as to the practice of the community or of a class, or because of some opinion as to policy, or, in short, because of some attitude of yours upon a matter not capable of exact quantitative measurement, and therefore not capa¬ble of founding exact logical conclusions. Such matters really are battle grounds where the means do not exist for the determinations that shall be good for all time, and where the decision can do no more than embody the preference of a given body in a given time and place. We do not realize how large a part of our law is open to reconsidera¬tion upon a slight change in the habit of the public mind. No concrete proposition is self evident, no matter how ready we may be to accept it, not even Mr. Herbert Spen¬cer’s Every man has a right to do what he wills, provided he interferes not with a like right on the part of his neighbors.


206. See infra notes 217–233 and accompanying text. R


second irony is far more subtle.207 Both schools of pragmatism, the moderate and the skeptical, reject any role for nonempirical reason in the determination of moral ends, placing Kant’s philosophy in that school. Yet a careful reading of Kant, and subsequent and more ac¬cessibly written restatements of his philosophy, shows that Kant him¬self would have rejected the extreme skepticism of Judge Posner as a new dogmatism.208 Indeed, we can view Kant’s philosophy of contin¬gency as the very pragmatic idealism we would expect to see in a law¬yer who is not only capable of deciding and interpreting ex post, but of creating value ex ante.

1. Legal Pragmatism at War with Itself

One of the problems in describing legal pragmatism is the breadth of thought subsumed within it, and the number of legal scholars who characterize themselves as legal pragmatists. At least one scholar has attempted to state a common denominator.209 Legal pragmatists, like their philosophical antecedents, believe knowledge is “contextual”— embodied in language, experience, culture, and practice—and “instru¬mental”—meaningful only as a tool to solve real problems.210 In par¬ticular, all pragmatists would reject that part of Kant’s philosophy that attributes any ability of reason to access truth or morality (pure or practical reason) either because they deny the existence of an external reality accessible only by reason, or if they do not deny it, they do not believe it has any value in addressing the problems of contingency:

This is not to suggest that the pragmatist denies the existence of a world external to the human mind. For the pragmatist, however, classifying statements as true by virtue of their correspondence to external reality is simply not a productive activity. The pragmatist suggests that we would be better off if we abandoned attempts to ground our beliefs in some external reality, and that the task of phi¬losophers, poets, and scientists (and, I would add, of lawyers and judges as well) is to come up with better ways of helping us to cope in the face of radical uncertainty.211

As a general statement, pragmatists employ a methodology in resolving legal issues that rejects the grounding of law in any single overriding value, doctrine, policy, or set of principles .212 They look to “practical reason,” but not the practical reason that Kant holds may

207. See infra notes 209–216 and accompanying text.

208. See infra notes 235–265 and accompanying text.

209. See generally Thomas F. Cotter, Legal Pragmatism and the Law and Economics Move

ment, 84 GEO. L.J. 2071 (1996).

210. Id. at 2075–79.

211. Id. at 2075–76 (footnotes omitted).

212. Id. at 2082–85.

1118 DEPAUL LAW REVIEW [Vol. 54:1073

access a priori moral imperatives.213 It is instead “intersubjective un¬derstanding through ‘dialogue, conversation, undistorted communica¬tion, communal judgment, and the type of rational wooing that can take place when individuals confront each other as equals and partici¬pants.'”214 And legal pragmatists reject sharp distinctions between ends and means:

[G]oals themselves are never final

In short, the moderate and benign view of pragmatism is that it rec¬ognizes the complexity of human experience and rejects almost no ap¬proach that might aid us in dealing with contingency: “Pragmatism recognizes that no one way of analyzing a problem captures every¬thing, but rather that any method illuminates and privileges some phe¬nomena and some values while obscuring and denying others.”216

Legal pragmatism takes a far more acerbic and strident turn in the writings of Judge Posner, whose skepticism is far more radical and ab¬solute than the benign and open spirit of questioning that emanates from other legal and philosophical pragmatics.217 His two recent

213. See infra notes 246–259 and accompanying text.

214. Cotter, supra note 209, at 2087 (quoting RICHARD BERNSTEIN, BEYOND OBJECTIVISM AND RELATIVISM 223 (1983)).

215. Id. at 2093 (quoting Thomas C. Grey, Holmes and Legal Pragmatism, 41 STAN. L. REV. 787, 852 (1989)).

216. Id. at 2141.

217. It is hard not to be overwhelmed by the sheer power of Judge Posner’s breadth of knowl¬edge and persuasive passion, part of which, I believe, is the result of his certainty in the rightness of his position. As an example, the following is his assessment of the value of moral philosophy, in a nutshell:

It is because of the importance of distinguishing the moral entrepreneur from other moralists that I define my main target in this chapter as academic moralism. Moral entrepreneurs play a role in the evolution of morality


makes typically broad empirical statements about lawyers, judges, and philosophy: “[Orthodox pragmatism] has become a part of technical philosophy, in which few judges or practicing law


works, Problematics of Moral and Legal Theory218 and Law, Pragma¬tism, and Democracy,219 set forth a theory that he describes as “prag¬matic moral skepticism”220 and apply it to issues as diverse as legal professionalism,221 euthanasia,222 constitutional theory,223 antitrust,224 legal positivism,225 President Bill Clinton’s impeachment,226 and Bush v. Gore.227 While whole armies of scholars are no doubt thankful to Judge Posner for providing a juicy foil,228 I address only the very broad issue of “pragmatic moral skepticism” as I believe it impacts addressing contingency in the practice of complex deal law.

What is clear is that Judge Posner’s approach to moral philosophy is not even pragmatically agnostic. His is a purely scientific approach— despite his claim to the contrary. He does not object to theory as such: “Economic theory, and the parts of the natural sciences with which I have at least a nodding acquaintance, such as evolutionary

yers take any interest.” POSNER, supra note 14, at 41. “[A]cademic philosophy [is] a field that has essentially no audience among judges and lawyers.” Id. at 11.

I hardly consider myself as having been imprisoned in an ivory tower, and would defer to Judge Posner on any empirical observation about the behavior of judges. I do not apply the same level of deference, however, about empirical observations of practicing lawyers. Practicing lawyers do not think about philosophy in their work, on the whole, any more than they consider microeconomics, game theory, chaos theory, or other scholarly attempts to make sense of, and predict, what they do and why. But I do see a connection between moral philosophy and the real world. I have seen real world business executives demonized and ultimately consumed by an inability to reconcile the “is” and the “ought,” the randomness of nature against the order our minds attempt to construct around it. I have also seen real world business executives who con¬tent themselves with, and find a way to justify, the world as it is. My casual empiricism tells me both fail as leaders. My goal is to place these empirical observations in a scholarly framework at least as legitimate as economic analysis. Outside legal and economics scholarship, Adam Smith is not the only eighteenth century thinker whose ideas are still considered worthy of application to our world

218. See POSNER, supra note 217.

219. See POSNER, supra note 14.

220. POSNER, supra note 217, at 8–13.

221. Id. at 185–226.

222. Id. at 128–34.

223. Id. at 144–82.

224. POSNER, supra note 14, at 234–47.

225. Id. at 250–91.

226. Id. at 213–34.

227. Id. at 322–56.

228. Problematics and the article on which it was based have generated many thousands of words in response. One issue of Volume 111 of the Harvard Law Review is devoted almost entirely to the original article, reactions of a number of other scholars, and Judge Posner’s reply. See generally, e.g., Charles Fried, Philosophy Matters, 111 HARV. L. REV. 1739 (1998)

1120 DEPAUL LAW REVIEW [Vol. 54:1073

biology, seem to me both beautiful and useful.”229 But as Judge Pos¬ner’s epistemology is traditionally empirical, his theory is only valid when “it is about observable phenomena and ‘real’ (physically ex¬isting), entities, [and] can be tested by comparing the predictions gen¬erated by the theory with the results of the observation[s].”230 As to what we can know of the world a priori solely by our reason, Judge Posner is a child of Hume: “Neither logic nor any empirical protocol guarantees truth. So even scientific knowledge is tentative, revis¬able—in short, fallible.”231

But as to moral philosophy, there is no doubt:

229. POSNER, supra note 217, at 13. Why a committed pragmatic moral skeptic like Judge Posner would express the judgment that a theory is “beautiful” in addition to “useful” is in fact the subject of Kant’s Critique of Judgment, the third of his “Critical Works.” See generally IM

MANUEL KANT, Selections from Critique of Judgment, in BASIC WRITINGS OF KANT, supra note

133, at 273. His answer lies in the paradox presented by the fact that our judgment is clearly our own and subjective, yet it purports to look at the world and make an objective statement that the pleasing aspect of the thing observed is universal. In the interest of full disclosure, Hume noted the same paradox, disclaiming any role of reason in assessing the beautiful. See generally David

Hume, Of the Standard of Taste, in FOUR DISSERTATIONS (1757), excerpted in PHILOSOPHY: BA

SIC READINGS, supra note 132, at 393–408. He concluded instead that what we perceive as beau¬tiful is simply that which has been so perceived in all ages and all countries. Id. But not everyone, according to Hume, can discern beauty. It is a matter of having “delicacy of imagina¬tion,” “practice in a particular art,” “opportunity of comparing the different kinds of beauty,” and “a mind free from all prejudice.” Id. Men labor to achieve all of these skills, which alone entitle one to adjudge the “true standard of taste and beauty.” Id. at 403. Asks Hume, “But where are such [men] to be found? By what marks are they to be known? How distinguish them from pretenders? These questions are embarrassing . . . .” Id. I leave the answers to those questions to the rational actor theorists.

230. POSNER, supra note 217, at 13. The devotion to scientific method as the sole determinant of pragmatic truth is echoed in other treatments of law and economics. In responding to Amartya Sen’s theory of commitment as an alternative to the rational actor model to explain altruism, Eric Posner wrote: “The problem with Sen’s argument . . . is that simply assuming that people operate out of principle and rational calculation gives one less methodological purchase than the ordinary rational choice assumptions do, without, as far as I can tell, compensating for this loss by producing a methodological gain.” POSNER, supra note 5, at 146. See generally Amartya K. Sen, Rational Fools: A Critique of the Behavioral Foundations of Economic Theory,

6 PHIL. & PUB. AFF. 317 (1977).

231. POSNER, supra note 14, at 6. Judge Posner’s epistemology, if not his moral theory, seems to have taken a turn in the four years between Problematics and Pragmatism. In the former, he labels himself a “pragmatic moral skeptic.” POSNER, supra note 217, at 8. In the latter, he claims not only not to be a skeptic, but also to be affirmatively antiskeptical. POSNER, supra note 14, at 7. He claims not to be a radical skeptic because such a person would not be skeptical about his skepticism. Id. Pragmatists, like Judge Posner, apparently merely “doubt that skepticism or relativism can be proved to be wrong.” POSNER, supra note 14, at 8. Contrast this with the absolute and non-skeptical views about moral philosophy described in the text. Note also that the epistemological issue of the skeptic’s ability even to pose the skeptical question is the funda¬mental issue of the Critique of Pure Reason. “What are the presuppositions of experience? What has to be true if we are to have even that bare point of view which the skeptics ascribe to us?” Scruton, supra note 147, at 28–29.


And however all this may be, academic moralism has no prospect of improving human behavior. Knowing the moral thing to do fur¬nishes no motive, and creates no motivation, for doing it

In this again, Judge Posner descends directly from the skepticism of Hume, who famously described reason as the slave of the passions.233

The point is that the very absolutism that spurred philosophic prag¬matism appears in the absolute rejection of any role that philosophy might play in explaining contingency and prescribing the role of law¬yers in addressing it. Even those who would otherwise describe them¬selves as legal pragmatists turn squeamish with the elevation of economic theory as the predominant explanatory model of human activity.234

2. The Kantian Critique

Kant’s impulse to his critical philosophy was, by all readings, similar to the impulse of the skeptics or the pragmatists. But it is far more subtle, and more difficult to grasp, and in many ways far more unsatis¬fying, than either form of dogmatism: An absolutist explanation of everything in the world or an absolutist denial that anything can be explained. Some things can be explained, and some things cannot.

To make this clear, we first need to delve a little deeper into the way Kant explains moral law and how it relates to knowledge. In Kant’s famous words, Hume’s work awakened him from his “dogmatic

232. POSNER, supra note 217, at 7.


baum, Still Worthy, supra note 113, at 1776. Nussbaum argues:

Reading Richard Posner’s [‘Problematics’ article] is something like reading Hume’s Treatise with the Hume removed: like, that is, encountering the implausibly mechanistic picture of human personality and the defiant debunking of reason’s pretensions without at the same time, and inseparably, encountering the gentle, playful, and many-colored mind, thoroughly delighted by reason and human complexity, incomparably deft in ar¬gument, that again and again soars beyond and dives beneath the rigid structures it has erected for itself.

Id. (footnotes omitted).

234. See generally Cotter, supra note 209, at 2130–35. In addressing the incommensurability thesis, discussed supra note 166 and accompanying text, “the pragmatist is skeptical about any proposal that sets up economic efficiency as the exclusive, or even predominant, criterion in¬forming a given area of the law . . . . To believe, as does Posner, that it would be an improvement if all of law could be reduced to instrumental terms is to fall into yet another foundationalist trap.” Id.

1122 DEPAUL LAW REVIEW [Vol. 54:1073

slumbers,” that is, an unthinking acceptance of the role of reason.235 In similar fashion, I will try to respond to Judge Posner’s skepticism as Kant did to Hume.

The first pages of The Critique of Pure Reason spell out the problem Kant seeks to resolve. As Hume observes, all of our knowledge be¬gins with experience.236 But that it begins from experience does not necessarily lead to the conclusion that all knowledge arises from expe¬rience: “It is therefore a question which deserves at least closer inves¬tigation, and cannot be disposed of at first sight, whether there exists a knowledge independent of experience, and even of all impressions of the senses?”237

As discussed in Part II, Kant answered the question “yes,” but with an explanation. The knowledge claims of reason are limited to that which relates to experience, but reason may make a priori claims of morality. As we will see, it is the same reason. There is a unity in how our reason approaches both truth (as in scientific method) and moral¬ity (as in concluding that reason is not a slave of the passions in help¬ing decide what we ought to do). We need not ignore nor deride where our minds may take us, but instead may find an explanation based in reason for the fact that we—skeptics, pragmatists, and ideal¬ists alike—even perceive a sense we call contingency (much less the contingency that might be addressed by a legal contract). In short, our reason takes us to a place that is ideal, as we think the world ought to be. The world does not necessarily follow. And that gap, between the “ought” of our reason—how things should turn out—and the “is” of experience—what really happens in the world—is how we define con¬tingency.238 For the ploughman and the practical professor, I argue that there is more practical value for the working deal lawyer in this philosophical understanding than the legal pragmatists give credit.

a. The Nature of Reason

First, we need to understand something about Kant’s explanation of the workings of reason. Not being tied to any form of experience, in Kant’s view, our reason nevertheless organizes our perception of ex¬perience .239 It does so through an innate drive to seek the Uncondi

235. Immanuel Kant, Prolegomena to Any Future Metaphysics, in THE PHILOSOPHER’S HAND¬BOOK, supra note 120, at 389.

236. See supra notes 133–144 and accompanying text.

237. KANT, supra note 133, at 25.

238. My discussion of Kant here and in the sections that follow is drawn from NEIMAN, supra note 233.

239. See id. at 61–62.


tioned. When we begin to investigate nature, our reason, quite apart from any experience, simply assumes from the outset (a priori) that there are empirical laws governing what we see. Think about our ex¬ploration into subatomic particles. We began with the ancient Greeks speculating whether the elements were one or four. Now we are dis¬covering the proton’s parts—quarks and mesons, which are held to¬gether by forces—the weak force, the strong force, gravity, and electromagnetism. We describe these forces by application of our rea¬son to more and more data, spurred by reason telling us that we still do not have the final and unconditioned answer. As Susan Neiman describes it:

A state of affairs is presented in appearance. Reason is thereupon moved to ask for its conditions, that is, the premises upon which it appears in just this way at just this time. The regress thus prescribed is simply the attempt to explain the ordinary data of experience. A full explanation cannot rest content with the statement of the condi¬tions of the initial state of affairs that demanded it. These condi¬tions, in turn, must be explained, and their conditions, until we reach a point at which no further explanation is conceivable. This point, at which the given would appear as self-explanatory and hence necessary, is the Unconditioned.240

All references to the Unconditioned are metaphors

b. Reason and the Scientific Method

Kant claims that reason demands to systematize what we experi¬ence, and these demands form the basis of science, with the following implications:

We assume that nature as a whole forms a system according to empirical laws.

240. Id. at 63.

241. Id. at 64.

242. Id. at 65.

243. See supra note 229 and accompanying text.

1124 DEPAUL LAW REVIEW [Vol. 54:1073

• We are able to go beyond present experience to possible experi¬ence, and posit truth claims about the unseen (e.g., mesons and quarks).

• We are able to deduce methodological principles that guide the inquiry: “Reason’s ability to do this stems from characteristics we have already noted: its role as an autonomous power [indepen¬dent of experience] gives it the capacity to select the elements of experience that are to be considered as well as, more generally, the capacity to formulate hypotheses that are not simply abstrac¬tions of statements derived from experience.”244

These principles taken together are the philosophical basis for the method Judge Posner so admires—the offering of a hypothesis and the subsequent measurement of its predictive power.

The ultimate irony is the ultimate paradox. Achieving knowledge of the Unconditioned (consider, for example, the issue surrounding teaching Creationism in the schools) would be the end of science. We seek knowledge with a drive that, if successful, would be the end of knowledge seeking.

c. Reason and Morality

We have not, until now, discussed how Kant viewed the operation of reason in the realm of morality. Unlike scientific inquiry into na¬ture, which seeks to know what is true, morality only requires that we determine what we ought to do .245

Kant approaches this by way of imperatives. An imperative is not a proposition claiming to be true or false, but claiming to say what we ought to do.246 A hypothetical imperative is one that may be true in all states of the world: “Tell a man, for example that he must be indus¬trious and thrifty in youth, in order that he may not want in old age.”247 A hypothetical imperative does not state a moral law—it de¬pends on the material and practical end being sought. If you want to

244. NEIMAN, supra note 233, at 70–75.

245. See Scruton, supra note 147, at 84. Scruton notes:

So conceived, the task of proving the objectivity of morality is less great than that of proving the objectivity of science, despite popular prejudice to the contrary. For the faculty of the understanding requires two “deductions”, one to show what we must believe, the other to show what is true. Practical reason, which makes no claims to truth, does not stand in need of this second “objective”, deduction. It is enough that reason compels us to think according to the categorical imperative. There is nothing further to be proved about an independent world.


246. KANT, supra note 13, at 171–72.

247. KANT, supra note 140, at 227.


go to a top law school, get good grades and score well on the LSAT. But you may not want to, in which case the imperative is not helpful.

In addition to the utilitarian hypothetical imperative, there is also what Kant calls a categorical imperative. In contrast to a hypothetical imperative, a categorical imperative strips away all empirical condi¬tions.248 There is no “if” at the beginning. By practical reason, we derive the “ought” statement that should be binding not only on our¬selves, but also on any rational person. It is the basis on which I may universalize a rule from my particular wants and needs to a general statement. Make no mistake: I cannot demonstrate the validity of a categorical imperative through empirical testing. It is synthetic—the statement is not simply true in itself—and a priori—it is derived solely

by my reason .249

There can be many categorical imperatives, but Kant focuses on three. The first is so well-known that it is not just a categorical imper¬ative, but is generally referred to as “the Categorical Imperative:” Act in a way that the principle of your action would be, by your will, a “Universal Law of Nature.”250

The second is to act so as to treat humanity, whether in my own self or in another’s, always as an end and never only as a means. As we must respect the autonomous rational agent that is our own self, we must treat others as autonomous beings and ends in themselves. As Kant emphasized, “Beings whose existence depends not on our will but nature’s, have nevertheless, if they are irrational beings, only a relative value as means, and are therefore called things

Finally, every rational being must act as if he or she were both a sovereign and a member of a kingdom of ends.252 This recognizes that each of us has a free and autonomous will that is sovereign for us, but which is required to see others, also having a free and autonomous will, as ends. Yet, reciprocally, as to that other, we are the end con¬templated by the other’s sovereign will. We are thus obligated, even while recognizing that the kingdom of ends is an unattainable ideal, to attempt to achieve it.253

248. KANT, supra note 13, at 172.

249. SCRUTON, supra note 109, at 284–85.

250. KANT, supra note 13, at 179.

251. Id. at 185–86.

252. Id. at 190–91.

253. Id.

1126 DEPAUL LAW REVIEW [Vol. 54:1073

The same paradox of science appears in morality. Our reason is capable of describing an ideal world—where the real and the rational are the same, where the “is” and the “ought” coincide––but the world has a stubborn way of not measuring up. Nevertheless, our reason seeks unconditioned and final truths about the linkage, for example, between virtue and happiness .254 Reason demands that the world make sense, but experience is random. Reconciling the two, says Kant, is beyond our means.255 As Susan Neiman explains, not only would attainment of the Unconditioned in science end science, but knowledge of a systematic link between happiness and virtue, even if possible, would be morally disastrous .256 If we know the formula that connects virtue and happiness, we would not be able (unless we were saints) to act other than as utilitarians, and in that we would have no free will. The essence of morality is choice, and there is no real choice unless we do not know whether virtue will be rewarded. What makes us moral versus merely good or happy is that we have to choose and

not know the reward .257

d. Reason and Dogmatism

Finally, there is a linkage among reason, dogmatism, and skepti¬cism. Contrary to the image often presented by the pragmatists,258 the notion that we will never know for certain whether goodness is linked to happiness is, paradoxically, humbling and pragmatic .259 As Susan Neiman observes, “For Kant, human virtue requires a stance that is demanding and complex: we must guide our actions by an idea of rea¬son, yet any purported assurance that we have attained this ideal would be self-defeating.”260

Consider the following Kantian assessment of Judge Posner’s “prag¬matic skepticism” and his rejection of philosophy as the “mind on hol

254. If you believe otherwise, and you are a person who regularly fastens your seat belt in the car, think about your instinctive reaction when hearing about a random death that was not the victim’s fault, to find out whether she was wearing her seat belt.

255. Susan Neiman observes about Kant’s philosophy: “The gap between nature and freedom, is and ought, conditions all human existence . . . . Integrity requires affirming the dissonance and conflict at the heart of experience.” NEIMAN, supra note 1, at 80.

256. NEIMAN, supra note 233, at 129–31.

257. NEIMAN, supra note 1, at 67–72.

258. POSNER, supra note 14, at 6 (stating that “[t]he consequences that concern the pragmatist are actual consequences, not the hypothetical ones that figure prominently in Kant’s moral theory”).

259. NEIMAN, supra note 233, at 132.

260. Id. at 131.


iday.”261 Susan Neiman summarizes the Kantian view of the urge to philosophy as follows:

Human reason is driven to seek the Unconditioned, the thorough¬going intelligibility of the world as a whole. Coming of age requires not abandoning, but redirecting this search: from dogmatic meta¬physics to empirical science, from a theodicy that affirms the social order to a political program that transforms it.262

Kant recognized the urge of unrestrained metaphysical meandering as the road to a dogmatic creed, deceived in its belief that it alone had reached the Unconditioned, but wholly or partially untethered to experience.

But the postmodern skeptic (like Richard Rorty, whom Judge Pos¬ner hails as a philosophical pragmatist one can understand)263 fares no better than the dogmatic absolutist, and Neiman’s explanation is wor¬thy of quoting in its entirety:

[Kant’s] conception of philosophy is fundamentally different from postmodern calls for an end to metaphysics because it is regulative, frankly directed toward the achievement of enlightenment. The Kantian answer to those who find its justification of that goal unac¬ceptably self-supporting is available in the [Critique of Pure Rea¬son]. Those who assume that if philosophy failed to provide us with certain knowledge, it can, at best, become an instrument of play ac¬cept the traditional assumption that only constitutive claims ensure genuine reality. Their rejection of metaphysics is merely the disap¬pointed mirror image of metaphysics itself. This is, I believe, the meaning of Kant’s claim that skepticism is simply counterdogmat¬ism []. The skeptic uncritically shares the dogmatist’s beliefs about the nature of reason and reality. His rejection of reason and philos¬ophy is based on their failure to succeed in terms of an unexamined and untenable model. Hence, their attitude toward the hope of en¬lightenment that underlies every attempt at philosophy is as dog¬matic as that of those who sought to fulfill that hope by constructing systematic metaphysics.264

Professor Charles Fried may have expressed the same thought in fewer words in his response to Judge Posner’s Problematics: “As so often happens, the skeptic here is a disappointed absolutist, taking his revenge on the world for depriving him of all the right answers all at

once. “265

261. POSNER, supra note 14, at 5.

262. NEIMAN, supra note 233, at 202.

263. POSNER, supra note 14, at 39–48.

264. NIEMAN, supra note 233, at 202 (footnote omitted).

265. Fried, supra note 228, at 1750.

1128 DEPAUL LAW REVIEW [Vol. 54:1073

C. Normative Recommendations

As we turn to normative proposals about dealing with contingency in complex business transactions, I am concerned I may be co-opted by the need to present an argument of utility. I should be advocating that those who agree with me, or leaders who act on the principles I advocate will be more successful, set better policy, maximize social welfare, and bring greater job satisfaction to their employees and a higher return to shareholders. But the nature of my Kantian belief in contingency says there are no guarantees of that—and so we find our¬selves in a paradox.

What is the philosopher-deal lawyer to do? Give up trying to pro¬duce results in the real world and engage only in speculative musings? Or conclude that the only way he or she can make a difference is to be a utilitarian? I will offer both hypothetical (i.e., instrumental) and cat¬egorical (i.e., universal and unconditional) imperatives. As to the for¬mer, I will consider the prominent place of something more than pragmatism—indeed, a Kantian limited idealism—in that most instru¬mental of arenas, business management and leadership (with some slightly non-utilitarian speculation about why there exists such a sig¬nificant divide between legal and business theorists on the subject of philosophy). As to the latter, I will draw on some examples where I believe a less economic and more philosophical approach for lawyers would be better, both for results and in itself.

1. Idealism in Modern Management Theory

The legal approaches to contingency we reviewed in Part II, despite the attempts to bring other disciplines to bear, are largely ex post and directed to legislators or judges. The modern literature of contingency for business leaders is far more robust.266 The literature incorporates two fundamental learnings from philosophy. First, there is a persis¬tent call in leadership to what can only be described as idealistic, tran¬scendental, or spiritual values.267 Second, true to the Kantian paradox, if those that are led believed that such appeals were wholly utilitarian, they would not work.268 Hence, business executives create

266. I speculate that two reasons explain this. First, there is the philosophically analytic: Leadership is inherent in the concept “business leader.” Nobody expects a lawyer to be a leader. Hence, leadership is generally not part of the formal or continuing legal curriculum. Second, I suspect that newly minted MBAs (I will give a pass to the organizational design specialists) are as likely as newly minted lawyers or legal economists to be overwhelmed by the sheer magic of their scientific skills (e.g., valuation techniques), if not the power of profit as motivation to all of the employees of the firm.

267. See infra notes 280–297 and accompanying text.

268. See infra notes 277–279.


value by an appeal to an “ought” whose realization in the world would necessarily bring an end to the impulse for creation of value.

a. The Management-Leadership Revolution

The business literature stems from a revolution in the philosophies of managing and leading business organizations over the second half of the twentieth century, very little of which appears to have surfaced in the scholarly literature of the law, or in practical manuals for work¬ing lawyers. A classic study in modern business literature, The Ma¬chine That Changed the World,269 recounts the history of this revolution and its impact. After World War II, Japanese industry de¬veloped production methods, particularly in what came to be known as the Toyota Production System, to address Japan’s global noncom¬petitiveness.270 This newer philosophy of “lean production” and the “lean enterprise” had a decidedly utilitarian outcome: It made mass production systems and organizational designs developed by Henry Ford and Alfred Sloan in the first half of the century obsolete.271 By the late 1980s, that obsolescence was a significant contributor to the actual and perceived decline of American industrial leadership.272 It triggered a massive American response—the management and pro¬ductivity revolution of the 1990s (and not coincidentally, the decade¬long boom economy).273 The irony is that, in substantial part, this revolution of management and leadership had to be something more than utilitarian to succeed.

Compare the Toyota system to the systems Ford and Sloan devel¬oped. On the factory floor, “Ford not only perfected the interchange¬able part, he perfected the interchangeable worker.”274 At General Motors, Alfred Sloan, an MIT graduate, applied the same principles to the organization and management of the enterprise itself



270. See id. at 48–51.

271. Id. at 44–47.

272. In his 1985 look back at his work on noncontractual norms, Stewart Macaulay referred to what was legitimately perceived at the time as “[t]he decline of the American industrial econ¬omy.” Macaulay, Empirical View, supra note 5, at 472.



274. WOMACK ET AL., supra note 269, at 30.

275. Id. at 40.

1130 DEPAUL LAW REVIEW [Vol. 54:1073

James Champy, one of the leading exponents of business reengineer¬ing, describes the philosophy:

“A great business,” said Henry Ford, who knew one when he saw one, “is really too big to be human.” The pronouncement, which many people would agree with, begs an interesting question: If a great business can’t be human, what can it be? Some image, or met¬aphor, is called for. . . . And there’s not much question what word Ford would have chosen to describe his “great business.” He would have called it a machine.

. . . .

. . . Through Sloan, the . . . ideas went well beyond the mechaniza¬tion of human labor, to the mechanization of management. Sloan imagined, and in fact realized, a management machine, a way to build not just cars, but an entire company.276

Now the buzzwords of the lean production revolution are part of the vernacular, and not just in business: empowerment, manufacturing teams and cells, kai-zen (continuous improvement), and kan-ban (just¬in-time inventory management).277 The human impact of lean pro¬duction on the factory floor, for example, illustrates the change. There are two essential aspects to a manufacturing team: (1) “workers actually adding value” to the product (those on the line) take on “the maximum number of tasks and responsibilities”

Our studies of plants trying to adopt lean production reveal that workers respond only when there exists some sense of reciprocal obligation, a sense that management actually values skilled workers, will make sacrifices to retain them, and is willing to delegate respon¬sibilities to the team. Merely changing the organization chart to show “teams” and introducing quality circles to find ways to im¬prove production processes are unlikely to make much difference.279

In short, mere practice is insufficient

b. Idealism and the New Leadership

The effect of the management-leadership revolution on resusci¬tating idealism as a means of addressing business contingency is ap¬parent even from the most cursory review of contemporary


277. WOMACK ET AL., supra note 269, at 62, 149.

278. Id. at 99.

279. Id.


management literature.280 Professor John Kotter of the Harvard Busi¬ness School is one of the most influential leadership theorists, and his exposition of the differences between management and leadership is a classic in the literature.281 It is also consistent with the description of how the business world has changed in the past fifty years.

Kotter sets forth the three primary functions of managers: planning and budgeting, organizing and staffing, and controlling and problem¬solving. But he distinguishes management from leadership, highlight¬ing the particular role leadership (as opposed to management) plays in dealing with contingency:

Management is about coping with complexity. Its practices and pro¬cedures are largely a response to one of the most significant devel¬opments of the twentieth century: the emergence of large organizations. Without good management, complex enterprises tend to become chaotic in ways that threaten their very existence. Good management brings a degree of order and consistency to key dimensions like the quality and profitability of products.

Leadership, by contrast, is about coping with change. . . . More change always demands more leadership .282

The respective leadership analogues of managerial skill consist of the following: (1) setting a direction

Motivation and inspiration energize people, not by pushing them in the right direction as control mechanisms do but by satisfying basic human needs for achievement, a sense of belonging, recognition, self-esteem, a feeling of control over one’s life, and the ability to live up to one’s ideals. Such feelings touch us deeply and elicit a

powerful response .284

The question answers itself: Is this empirical observation better sup¬ported by a philosophy of dogmatic skepticism (leading to the conclu

280. What follows is an unscientific sampling based on a representative selection from the management tomes presently sitting on my bookshelf, collected between the end of 1992 and mid-2004. In addition to those cited in the text, the following works are also instructive in seeing

a role for philosophy in leadership that addresses contingency: THE PRICE WATERHOUSE

CHANGE INTEGRATION TEAM, THE PARADOX PRINCIPLES (1996) (referring, inter alia, to Soren

Kierkegaard, Oscar Wilde, and Alfred North Whitehead on the role of paradox in the manage¬ment of chaos, complexity, and contradiction)

ing Character, HARV. BUS. REV. ON LEADERSHIP, Mar.–Apr. 1998, at 115 (quoting William

James regarding the utility of ideas)

the Take-Charge Manager, HARV. BUS. REV. ON LEADERSHIP, Jan.–Feb. 1994, at 128 (calling on

managers to return to the pragmatism advocated by 19th century American pragmatists).


282. Id. at 52–53.

283. Id. at 54–62.

284. Id. at 60.

1132 DEPAUL LAW REVIEW [Vol. 54:1073

sion that we should approach people solely as rational actors maximizing gains) or some kind of pragmatic idealism, grounded in the notion of others as subjects, not objects, and the achievement of a “kingdom of ends”?

Professor Peter Senge, whose principles are laid out in The Fifth Discipline, is perhaps the leading proponent of business as a “learning organization.”285 His work is both a theoretical exposition of human motivation and a practical manual for its use in the workplace.286 Without detailing the rubrics under which Senge organizes the princi¬ples of a learning organization,287 consider the philosophical nature of Senge’s take on the contingency of the world:

From a very early age, we are taught to break apart problems, to fragment the world. This apparently makes complex tasks and sub¬jects more manageable, but we pay a hidden, enormous price. We can no longer see the consequences of our actions

The tools and ideas presented in this book are for destroying the illusion that the world is created of separate, unrelated forces. When we give up this illusion—we can then build “learning organi¬zations,” organizations where people continually expand their ca¬pacity to create results they truly desire, where new and expansive patterns of thinking are nurtured, where collective aspiration is set free, and where people are continually learning how to learn together.288


286. Indeed, The Fifth Discipline generated a separate manual of case studies and practice


287. They are, briefly: “personal mastery” (developing our own abilities to bridge the gap between the current reality and the reality we would like to create)

288. Id. at 3. In a 1994 article in Fortune magazine, Senge described himself as an “idealistic pragmatist.” Brian Dumaine, Mr. Learning Organization, FORTUNE, Oct. 17, 1994, at 147. His work developed a significant following in corporate America, but also raised some concerns that he was leading a New Age cult:


But the learning Senge has in mind is, again, more than merely pragmatic or utilitarian: “[I]t is not enough merely to survive. ‘Sur¬vival learning’ or what is more often termed ‘adaptive learning’ is im¬portant—indeed it is necessary. But for a learning organization, ‘adaptive learning’ must be joined by ‘generative learning,’ learning that enhances our capacity to create.”289 Adaptive learning has to do with the “is” of current reality and the contingent future. Generative or leadership learning has to do with the “ought” of an ideal world— one without contingency.

Finally, in Senge’s conception of our own growth (what he calls per¬sonal mastery), he cites a poll pointing to “a ‘basic shift in attitude of the workplace’ from an ‘instrumental’ to a ‘sacred view’ of work.”290 Senge observes:

The instrumental view implies that we work in order to earn the income to do what we really want when we are not working. This is the classic consumer orientation toward work—work is an instru¬ment for generating income. Yankelovitch uses the word “sacred” in the sociological not religious sense: “People or objects are sacred in the sociological sense when, apart from what instrumental use they serve, they are valued for themselves.”291

This is almost a restatement of Kant’s notion of free will and auton¬omy of the self—the dualism between the empirical world of physical cause and effect and the domain of reason—where the essence of mo¬rality is reasoned choice. We work because it is the moral thing to do.

With Michael Hammer, James Champy advocated a business change model called “reengineering”: Drastic reshaping of business processes that threw out theories of organizing work (e.g., the division of labor, elaborate controls, the need for managerial hierarchy) dating back to the dawn of the Industrial Revolution.292 Two years later, Champy revisited the subject, asking why reengineering had not worked in many cases.293 Champy noted the difficulty with which managers let go of the image of factory and organization as machine:

Senge fears that being tarred with the New Age label will hurt the careers of those pioneering managers trying to spread the learning organization within their traditional corporations. But maybe Senge worries too much. Says Ford’s [Fred Simon, a senior platform manager], a big Senge fan: “Anybody who comes into my office doing a folk dance is fired.”


289. Id. at 14.

290. Id. at 144.

291. Id.


293. See generally CHAMPY, supra note 276. R

1134 DEPAUL LAW REVIEW [Vol. 54:1073

Don’t dismiss this notion [of the machine] too fast. It had, and con¬tinues to have tremendous appeal to all of us. Why? Because it is an ideal, a vision of perfected human activity. Human beings are just fine

What reengineering requires, says Champy, is more than letting go of command-and-control.295 It requires abandonment of faith in an eternal, universally right way of doing things (or the illusion of one conclusive solution to any business problem), but retention of faith in human beings: “the knowledge and belief that we are all eager to learn, and capable of dedication, high spirits, and individual responsi¬bility.”296 Finally, Champy observes what we have previously de¬scribed as the Kantian paradox:

“At the end of every day of every year, two things remain unshak¬able,” Roberto C. Goizueta, chairman and CEO of Coca-Cola Co., says. “Our constancy of purpose and our continuous discontent with the immediate present.”

Note the contradiction, the inconsistency, the zig and the zag be¬tween constancy and discontent. No hobgoblins, no corpses holding back this company . . . . Somebody once said that the best sign of intelligence is the ability to hold two good, but contradictory ideas in one’s head at the same time. More is required of management today than intelligence. Character is required, and the best sign of it—the reengineering character anyway—is not only to hold two good, contradictory ideas, but to act on them.297

How do we explain this significant gap between, on one hand, the contingency philosophies inherent in legal scholarship, where the pre¬vailing views range from moderate pragmatism to radical skepticism and, on the other hand, philosophies of contingency inherent in mod¬ern management theory that range from a moderate pragmatism to Kantian dualism to a significant dose of idealism? I suggest the an¬swer lies in a thought expressed above. Legal scholars have difficulty escaping the multiple bonds of the legal model, the new orthodoxies of economic analysis, and the prevailing hindsight view that is peculiar to judges and to the way we teach the law by the reading of litigated cases. Because lawyers play on business turf in the creation of deals, and business people play on legal turf in the later litigation, theory

294. Id. at 13.

295. Id. at 29.

296. Id. at 26–27.

297. Id. at 38. Cf. Lipshaw, supra note 3.


about ex ante creation versus ex post interpretation is largely relegated to business thinkers.

2. Idealistic, Pragmatic, and Creative Lawyers

The lesson of business leadership theory is that there is a place for idealism in the empirical and instrumental world. Great business leaders envision a world as they want it to be (ideal—as it ought to be) but are not consumed by the fact that things do not always work out as they should. They understand and adapt to contingency, but not as skeptics or even pragmatic skeptics.298

Moral philosophy offers practicing lawyers several categorical im¬peratives. Our reason is capable of letting us see how to bridge the “is” and “ought”—to see the ends of a deal as well as the means to get it done. One of the deans of the academics of entrepreneurship, Wil¬liam Sahlman, has also aptly described a kind of pragmatic idealism that is distinct from reliance on legal or economic models .299 Sahlman disdains entrepreneurs and investors smitten by valuation methodolo¬gies and deal terms, noting that entrepreneurs naively seek passive investors, like doctors and dentists, rather than sophisticated venture capitalists who demand control and a larger share of the returns.300 Sahlman observes, “New ventures are inherently risky, as I’ve noted

Often, deal makers get very creative, crafting all sorts of payoff and option schemes. That usually backfires. My experience has proven again and again that sensible deals have the following six characteristics:

§ They are simple.

§ They are fair.

§ They emphasize trust rather than legal ties.

§ They do not blow apart if actual differs slightly from plan.

§ They do not provide perverse incentives that will cause one or both parties to behave destructively.

298. Pragmatism is simultaneously criticized and defended, and both views are consistent with the idea that pragmatism simply refuses to recognize the role of our reason in driving us to the “ought” of the ideal world. The criticism is that pragmatism privileges the status quo and the prevailing political ideologies. The defense is that pragmatism provides a philosophical basis for gradual and incremental changes. Cotter, supra note 209, at 2073 nn.9–10.

299. William A. Sahlman, How to Write a Great Business Plan, HARV. BUS. REV. ON LEADER

SHIP, July–Aug. 1997, at 98.

300. Id. at 107.

301. Id.

1136 DEPAUL LAW REVIEW [Vol. 54:1073

They are written on a pile of papers no greater than one

quarter inch thick .302

When a practicing deal lawyer sees more than the model of the law or the rational actor, he or she becomes a participant in the creation of value. In Silicon Valley, successful venture capital lawyers have managed to discard that “inflated ‘rights consciousness’ that disrupts more flexible and consensual extralegal relationships.”303 They ab¬sorb uncertainty by being creative in their fee structures304 and their approach to opinion letters .305 By the clients they take on and en¬courage, these lawyers help determine which entrepreneurs obtain fi¬nancing.306 They often serve as the first business advisor the entrepreneur has ever had .307 They create market standards for deal terms .308 Effective M&A lawyers engage in the “creative discovery of common ground.”309 They act as wise counterweights to their clients, offering “persistence” toward the goal when necessary and “perspec¬tive” when appropriate.310

What we accomplish by means of our reason in crafting deal solu¬tions is our handiwork. In her article on the process by which judges make decisions, Linda Ross Meyer has defended practical reason, challenging postmodern and pragmatic rejection of all theory, and she builds a bridge from philosophy to practice .311 Her use of Heidegger’s explanation of thinking is one of the only allusions to the process of ex post legal interpretation I find to be equally applicable to ex ante dealmaking. Heidegger compared thinking to handiwork to make the point that there is a fundamental relationship between thinking and the physical world that is prior to, in Kantian terms, pure or practical reason: “If he is to become a true cabinetmaker, he makes himself an

302. Id.

303. Suchman & Cahill, supra note 200, at 680 (footnote omitted).

304. Id. at 691–94.

305. Id. at 694–97.

306. Id. at 698–99.

307. Id. at 699–702.

308. Id. at 702–03.

309. FREUND, supra note 12, at 18–21.

310. Id. at 25–26. See PETZINGER, supra note 167, at 186–87 (describing how Arthur Liman

summoned the courage to act as a counterweight to Hugh Liedtke’s rage in the midst of the

Getty/Pennzoil negotiation). Petzinger writes:

Liman did not relish calling across the street to the Waldorf and telling his client that he

couldn’t even get the new proposal inside the four walls of the boardroom. Even to a

high-powered lawyer like Liman, “Chairman Mao” was an intimidating figure. But Liman dialed the phone anyway and got Liedtke up from the lunch table. Liedtke let loose a chain of expletives. In the face of the tirade, Liman drew his breath.


311. See generally Linda Ross Meyer, Is Practical Reason Mindless?, 86 GEO. L.J. 647 (1998).


swer and responds above all to the different kinds of wood and to the shapes slumbering in the wood.”312 Meyer transposes the allusion of cabinetmaking as practice to thinking as practice:

Practice is significant and meaningful

Part of my practice is counseling na¨ive entrepreneurs about a dilu¬tion structure that will cause them to get, percentage-wise, a smaller piece of a growing pie, but one that grows in absolute size. Another part is hearing my client in a deal negotiation propose a solution that is far too broad for the problem and hearing the other side do the same in response. In each case, the possibilities I bring to the table are the shapes I see slumbering in the wood—out of the dreams and expressions of my clients and others, I craft the cabinet of a deal.

Meyer’s own normative recommendations about the marriage of theory to practice (directed largely to judging) are echoed in Freund’s comments about practice: It “often boils down simply to a matter of ‘feel,’ based on experience—as to where, for example, a particular line can and should be drawn, to compromise opposing viewpoints while adequately protecting each of the parties.”314 The “technological col¬onization” of the law is unlikely to help us understand or teach “feel

Our reason is capable of turning us into dogmatists, in our lives gen¬erally or in a conference room specifically. The same gift—the drive

312. Id. at 654–55 (quoting MARTIN HEIDEGGER, WHAT IS CALLED THINKING 14 (Fred D.

Wieck & J. Glenn Gray trans., 1968)).

313. Id. at 656.

314. See FREUND, supra note 12, at 2.

315. Meyer, supra note 311, at 673–74. Expressed in far less technical terms, we are awash in information. That is one degree removed from knowledge, and still another from wisdom.

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to find the Unconditioned—that makes us look for universal laws of nature and morality contains a curse if we give it too much credit. When faced with paradoxical choices between competing and mutu¬ally exclusive values (individual or team, data or intuition, doing it fast or doing it right, justice or mercy), we have three alternatives. We can drive to one pole or the other, or, as writer F. Scott Fitzgerald sug¬gested, hold both opposing views in the head at the same time and still maintain our ability to function.316 Of the three, the third is the most difficult to adopt as a day-to-day operating philosophy, precisely be¬cause reason itself rebels against it and continues to seek the Uncondi¬tioned. Theodicy explains or justifies evil, and, even in the third millennium, the phrase “God’s will” continues to be comforting and meaningful to saints and sinners. For most of the Western intellectual class, however, theodicy went out over two hundred years ago, leaving us with only two alternatives: Wake up each morning to face the day holding two opposing views in mind or divide the world into the force of good (usually us) and the independent world of evil (usually them). You may not be any happier or more comforted in the latter case, but

at least you will be right .317

The same dogmatism haunts the negotiating table, and regularly shows itself in the rigidity or obstinacy of both lawyers and clients. Deal-killing occurs when we need to be right, regardless of the practi¬cal risk or the present consequence. Pragmatism leaves us flexible enough to avoid the problem, but idealism is the energy behind crea¬tivity. Pragmatic skepticism is wonderful for hindsight and nit-pick¬ing, but hardly the stuff of moving forward .318

316. Quotation Details, The Quotations Page, available at quote/90.html (last visited Apr. 4, 2005).

317. This is my thesis for the current state of electoral politics. It is difficult to sit in the middle of the road anymore, holding perhaps but not exclusively the following m´elange of view¬points: hates the idea of an abortion but supports the right to choose

318. See France, supra note 12, at 88–90, on the common prejudice in the business world that lawyers make bad corporate leaders:

Often unschooled in accounting or finance, lawyers start their careers in a strange world where risk is frowned upon, colorful marketing is unethical, people rarely work in big teams, and nobody makes a decision without reviewing stacks of paperwork first. . . .


We should undertake a moral approach to our involvement in the dealmaking process—to see each other as subjects and not objects— and do so because it is worthy in itself, and not because it is guaran¬teed or even more likely to produce utility. Relevant here is the bril¬liant and moral work of Jonathan Cohen on the varied forms of rationality in negotiation,319 and negotiating with respect .320 As to the latter, he persuasively argues the a priori thesis that there is a general moral duty to respect other people—a duty that is not overridden by the fact of negotiation or the various justifications that people might find in the course of negotiations for not treating others with re¬spect .321 His thesis—that we are morally obliged to see each other as subjects and ends, not as objects and means—is, as he recognizes, fun¬damentally Kantian.322 How might this surface in practice? I offer two hypothetical situations .323

Situation 1: A lawyer represents a company in the automotive aftermarket manufacturing and distribution business. The company makes and sells spark plugs and filters under some well-known brand names. In Mexico, there is a filter company with which it is negotiat¬ing a distribution joint venture. After six months of tough negotiating and on the eve of signing a contract (without any indicia of a deal as there was in the Getty/Pennzoil negotiation), the businessperson in charge of the deal says to the lawyer, “We have just come up with an alternative joint venture partner, and, now that we think about it, it’s really a better deal. Is there any reason why we can’t do it?” The legal model has an easy answer: There is no reason not to go with the second deal. The answer of the rational actor/economic model is more difficult to determine: It depends whether the theorist can really construct an economic model incorporating all the state contingencies of behavior that we may characterize as legal yet opportunistic. Both

Risk aversion can be another problem. People who go to law school rather than B-school tend to be more cautious. After all, they’re choosing a career that holds out the prospect of a guaranteed good income – rather than a small chance of a spectacular one. What’s more, the main goal of business lawyers is not to maximize profits but to minimize danger. “Good CEOs have to be able to make tough, bold decisions in the face of uncertainty – and that’s hard for lawyers,” says James C. Gaither, a former corporate attorney who is managing director at the Silicon Valley firm Sutter Hill Ven¬tures. “Lawyers want to keep working until they find the perfect answer.”


319. See generally Jonathan R. Cohen, Reasoning Along Different Lines: Some Varied Roles of

Rationality in Negotiation and Conflict Resolution, 3 HARV. NEGOTIATION L. REV. 111 (1998).

320. See generally Cohen, supra note 56.

321. See id. at 750–51.

322. Id. at 751 n.26. Cohen does not suggest, however, that Kantian philosophy is the only way to arrive at the conclusion that we are morally obliged to respect others.

323. Both of these situations are derived from transactions in which I participated.

1140 DEPAUL LAW REVIEW [Vol. 54:1073

are valid ways to approach the issue, but there is a third approach, and it involves seeing the other party as subject and end, and not merely object and means. So the lawyer says, “There really isn’t a legal claim from potential partner 1, but that’s a minimal standard in any case. Whether or not you have actually signed the contract, is this an area in which you can afford to act opportunistically? And is your calculation based on a good utilitarian model? Partner 1 will be angry. Have you really thought through whether the benefit received from Partner 2 will exceed the pain of extracting yourself from Partner 1? But most importantly, is that how you want to do business? What do you think the right thing to do is? How would you react if the situation were reversed? And how does that factor into your analysis?”

Situation 2: You are the in-house lawyer for a diversified multina¬tional company. The company (Seller) has signed a definitive agree¬ment to sell its micro-widget division for one billion dollars to a relatively new, growing player in the widget industry (Buyer). You and your business colleagues at Seller know that Buyer’s executives have been scraping together financing in about the same way you scrounge around the house for money when it is time to pay the baby¬sitter late on a Saturday night and you are out of cash.

One provision of the post-signing covenants in the definitive agree¬ment says Seller may factor the division’s accounts receivable until the closing. In practice, what this means is that Seller sells the accounts receivable to a bank (a factor) for a small discount, and takes the cash out of the business. Under the framework of the agreement, it all should work out in the wash, because the post-closing adjustment, which compares the net assets of the division as of the closing with a base line net asset figure, should account for it. Hence, if Seller fac¬tors $50 million in receivables, it will owe the Buyer that $50 million (plus interest) in about six months when the parties resolve all the post-closing adjustment claims.

The only problem is, unbeknownst to Seller, the Buyer’s financing is conditioned on the accounts receivable being there to help finance the business over those intervening six months, and because of what Seller did (perfectly permissible under the contract), $50 million will be missing from the business. The Buyer will be in breach of loan cove¬nants from the day it first owns the business, and perhaps even insol¬vent in the equity sense (unable to pay bills as they come due).

The Buyer is not particularly deal-savvy. Its lawyers and finance people did not pick up the issue in the contract. Its treasurer did not react a week prior when Seller’s treasurer said he was going to factor the receivables. Now, at the closing on a Friday afternoon, only an


hour before the federal wire for the transfer of inter-bank funds shuts down, Buyer’s CEO and CFO tell you they cannot close unless Seller agrees to put $50 million dollars cash back in the business. Buyer has no contractual right to make that demand, and the contract provides for an unsecured $150 million in liquidated damages if the Buyer does not close by the end of business that afternoon. You can see the sweat dripping off the Buyer’s CEO and CFO. They tell you either to put the money back into the business or to sue us for the $150 million. Your own CFO is on the other end of a phone line, railing on and on about how stupid the Buyer is, and how he, the CFO, had a legal right to factor the receivables.

What do you do? Apply the legal model? A legal rationalist, en¬amored of the state contingencies anticipated in the contract, regard¬less of what the world turned out empirically to be, might well turn to the remedies anticipated by the contract. Apply an economic model? I suspect even the brightest economist will not be able to compute that many moves and consequences that quickly. Apply the categori¬cal imperative? Maybe there is some intuitive sense of how one would act in this situation if one could will what any person would want the universal rule to be—that is, if the positions were reversed.

I submit that there is no scientific or social scientific model that provides answers in either of these situations. The solutions lie in cre¬ativity, vision, and leadership that are beyond mere pragmatic skepti¬cism and economic models.


My claim about the positive role of philosophy in explaining behav¬ior and setting norms should not be overstated. I do not claim that there are no ex ante concerns about ex post judicial interpretation. To the contrary, good deal lawyers think not only about the document, but also about the drafting history. For example, if my redraft sug¬gests a clarification of ambiguous language, and you reject it, am I worse off than before? That is, would a court consider that fact to be my acknowledgment that your interpretation is correct if what we re¬ally want to do is agree to disagree? I am only suggesting that philos¬ophy has something to say about creativity and leadership in the interpersonal process of closing very complex matters—here, the transfer of, or creation of, businesses.

This Article has not addressed an important issue which deserves further thought. I do not address issues of the morality of the transac¬tions themselves, or the conditions that have necessitated them. As¬sume the following hypothetical. I am brought in as the CEO of a

1142 DEPAUL LAW REVIEW [Vol. 54:1073

company, the demand for whose product (i.e., buggy whips, main¬frame computers, or VCRs) has diminished almost overnight because of the rapid appearance of a superior substitute. I determine that there is no option but to write off some assets and sell others. The consequence will be that 2,000 people will be laid off, but for 8,000 others, the business and their jobs have a chance to survive. I do not discuss here the moral implications of the decision to do so.324

In this Article I have argued that the narrow confines of the law relating to commercial contingency and the strictures of the law and economics model that dominate contract theory are insufficient to ex¬plain contingency in complex transactions or to guide lawyers in deal¬ing with it. Practicing deal lawyers would be well served by looking to philosophy, particularly Kant’s views on the uses and limits of reason, in addition to welfare economics and game theory for cross-discipli¬nary normative proscriptions. Finally, I have suggested that lawyers who are legal or economic dogmatists, seeing the world only as they want it to be, or who are only pragmatic or empirical, and acknowl¬edge only the world as it is, will be far less effective in the highly contingent environment where contracts create more moral than legal markers. The most effective real world deal lawyers will be prepared to address contingency and counsel their clients pragmatically, but with far more idealism than current proponents of the jurisprudence of either legal pragmatism or “pragmatic moral skepticism” have acknowledged.

324. I have a tentative thesis, but it is a work in progress. In short, I am willing to concede the simultaneous operation of economic laws and moral laws. They are, respectively, the embodi¬ments of the critical distinction in Kant between the nature of instrumentality and the nature of free will or autonomy. Our needs in everyday life are fulfilled by instrumental relationships all the time. Discernable physical and economic laws govern the satisfaction of what Kant calls our inclinations (our tangible and intangible needs). The principle of microeconomics that holds that a rational firm will shut down the plant when the marginal cost exceeds the marginal revenue is morally neutral (at least it is to me, but I recognize others, socialist or critical legal theorists, for example, may disagree). The moral questions, on the other hand, are: At the time reality com¬pels your action, are the employees persons or things to you? How do you handle the layoffs? Do you provide outplacement? Is the severance sufficient? Have you developed your employ¬ees so that they have transferable marketable skills?

The “rules of the deal” are one thing. Harder cases, like the oxymoronic subject of the “rules of war” (e.g., Abu Ghraib, acceptable collateral damage, the role of evil, good or absent inten¬tion when great harm is inflicted) are another. The issues are related, but discussing them here trivializes the real issues of evil. For a far better discussion of that issue, see NEIMAN, supra note 1. For a libertarian parsing of a purely utilitarian approach to using others as instrumentalities,