Insincere Promises: The Law of Misrepresented Intent 9780300127133

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Insincere Promises

Insincere Promises The Law of Misrepresented Intent

Ian Ayres and Gregory Klass

Yale University Press New Haven and London

Published with assistance from the foundation established in memory of Philip Hamilton McMillan of the Class of 1894, Yale College. Copyright © 2005 by Yale University. All rights reserved. This book may not be reproduced, in whole or in part, including illustrations, in any form (beyond that copying permitted by Sections 107 and 108 of the U.S. Copyright Law and except by reviewers for the public press), without written permission from the publishers. Set in Adobe Garamond and Stone Sans types by The Composing Room of Michigan, Inc. Printed in the United States of America. Library of Congress Cataloging-in-Publication Data Ayres, Ian. Insincere promises : the law of misrepresented intent / Ian Ayres, Gregory Klass. p. cm. Includes bibliographical references and index. ISBN 0-300-10675-0 (cloth : alk. paper) 1. Promise (Law) 2. Declaration of intention. 3. Fraud. I. Klass, Gregory. II. Title. K830.A99 2005 345.04—dc22 2004058451 A catalogue record for this book is available from the British Library. The paper in this book meets the guidelines for permanence and durability of the Committee on Production Guidelines for Book Longevity of the Council on Library Resources. 10 9 8 7 6 5 4 3 2 1

To Oliver Wendell Holmes Jr., whose seemingly conflicting views on this topic spurred us to write this book

Contents

Preface, ix 1

Introduction, 1

2

How to Say Things with Promises, 19

3

Falsehood and Responsibility, 46

4

Why Promissory Fraud?, 59

5

The Representation Inquiry: What Does a Promise Say?, 83

6

The Veracity and Scienter Inquiries: Evidence of Falsity and Evidence of Culpability, 113

7

The Landscape of Promissory Misrepresentation, 142

8

False Promise: Insincere Promising as Crime, 170

9

Teaching Promissory Fraud, 194

10

Conclusion, 201

viii

Contents

Appendix A: Draft Prestatement of the Law of Insincere Promising, 206 Appendix B: Promissory Fraud Abroad, 210 Notes, 215 Index, 285

Preface

This book began in our experience studying and teaching first-year Contracts. The results of many canonical cases—from Red Owl and Peeveyhouse to Bailey and Lefkowitz—seemed to turn at least in part on the whiff of misrepresented intent. But our contracts and torts professors and the casebooks they assigned gave short shrift to the tort of promissory fraud (not to mention the crime of false promise). This book is an attempt to revive scholarly thinking about an area of the law of contracts that is much litigated but little theorized. We also hope to provide practical advice on the contours of the doctrine, both for advocates and for judges, who must struggle to put the law’s condemnation of promissory insincerity into practice. Readers who are impatient for the real-world payoff might want, after reading chapter 1, to skip to our analysis of evidentiary issues, starting especially in the last section of chapter 5 and on through chapter 6, to chapter 7’s description of the dizzying range of situations where promissory fraud can arise or to chapter 8’s discussion of the crime of false promise. Our appendix A, a prestatement of the law, presents our normative bottom line in a nutshell. For the more theoix

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retically inclined, chapters 2, 3, and 4 present an analysis of just what insincere promising is and of why the law should concern itself with it. In our emersion in the case law, we have been aided by a number of able Yale law students, including David D’Addio, Benjamin Alarie, Susanne Augenhofer, Ryan Bergsieker, Sara Van Dyke, Jordan Factor, Sydney Foster, Benjamin Hance, Winter King, Praveen Krishna, Alex Lee, Ying Ying Li, Kevin Reed, Blake Rohrbacher, and Steven Wu. We thank both Tony Kronman and the Olin Foundation for financial support. Over the years we have repeatedly benefited from the comments of Dick Speidel, Carol Rose, Rob Gertner, and Lea Brillmayer and we are also grateful for the helpful comments on this manuscript that we received from Barry Adler, Richard Craswell, Kevin Davis, Jason Scott Johnston, and George Triantis, as well as from participants in the Wisconsin Conference on Freedom from Contract and the Yale Summer Olin seminar series. The Office of the New York Attorney General has graciously permitted Greg Klass to publish this book while employed there, on the condition that we make clear that the views expressed in the book are not necessarily those of that office. Finally, we must thank our families, without whose many forms of support this book would not have been possible.

Chapter 1 Introduction

You sit down in a diner and peruse the menu for a few minutes. When the waiter arrives and wishes you a good morning, you respond in kind and then say, “I want two eggs over easy with hash browns and rye toast.” According to the dictionary meaning of your words, you have just reported to a fact about your appetitive state. But of course what you have really done is order breakfast. The salient question in the situation is not your feelings toward this or that item on the menu but what the waiter should bring. Your words decide that. What you’ve said is also a type of promise. In context, the statement works as an implicit conditional promise: If you bring me these things, I will pay for them. Such implicit promises are standard fare in the first-year Contracts curriculum. Students similarly learn that by representing a fact, a contractual promisor implicitly warrants that the representation is true. The dictionary meaning of the words is correct and perhaps even intended, but it does not reveal the complete use to which those words are being put. While legal thinkers are well acquainted with the idea that statements of fact can be implicit promises, not much attention has been 1

2

Introduction

paid to the converse—that often enough the act of promising not only puts the speaker under an obligation but also represents something to be the case. A central thesis of this book is that to promise to do something is, in most cases, a multidimensional act, and that the law of contracts would do well to recognize its different meanings. The dictionary meaning of the words “I promise to” is that the speaker, by uttering them, puts herself under a certain obligation—an obligation to do the act promised. Philosophers of language sometimes refer to such speech acts as “performatives,” since by the very uttering of the words one performs some act.1 But just as the dictionary meaning of “I want two eggs over easy” masks those words’ performative force when uttered to a waiter, so the obvious performative force of a promise can obscure what it says about the world. In most (though not all) contexts, a promise to do something also represents that the promisor intends to do that thing. And, we shall argue, many promises say even more than this about the likelihood that the speaker will do the act promised. As the statement to the waiter both says something about one’s dietary preferences and does something about ordering breakfast, so a promise can both do something, by putting the speaker under an obligation, and say something, by representing that she intends to do the act promised, that there is a certain probability that she will perform, and perhaps more. Most legal and philosophical accounts of promising emphasize what promises do at the expense of what they say. This is not surprising, since it is their performative force that sets promises apart as particularly interesting sorts of speech acts. Philosophers find it endlessly fascinating that by the mere act of uttering certain words one can create a duty for oneself. Legal thinkers are faced with the more pressing practical problem of whether, why, and how the law should take cognizance of such duties. The representational dimension of promises has not been completely overlooked. Legal theorists who have attempted to reduce the law of contracts to the principles of torts, including Grant Gilmore and P. S. Atiyah, have characterized promises as predictions about what the speaker will do in the future.2 But these accounts generally make the opposite mistake, emphasizing what promises say at the expense of what they do. Accordingly, as philosophical accounts of promising they are deeply unsatisfactory. And as attempts at legal reforms they have generally failed. This book examines the legal relevance of the representational dimension of promising—the fact that promises often say something about the world. But it doesn’t deny the primacy of a promise’s purely performative aspect—the fact that by promising, one puts oneself under a certain obligation. We are not rev-

Introduction

olutionaries. We accept that most of the law of contracts is best viewed as playing a supporting role in the way that promises create obligations and we believe that this is proper. But we are reformers. Promises also convey information— especially information about the promisor’s intentions with respect to performance and, more generally, about the probability of her performance. The law can and should be structured to support such transfers of information.

HOLMES AND THE CURIOUS DOCTRINE OF PROMISSORY FRAUD

It is no doubt wrong to conflate promise breaking and lying.3 What parent hasn’t heard a child say, with no small degree of indignation, “You lied to me; you said you would [take me to the park, buy me an ice cream cone . . . ].” Accusations of this kind can be evidence of conceptual confusion: You might be a scoundrel for breaking your promise, but you are not thereby a liar—someone who knowingly misrepresents an existing fact. The act of promising to do (or to refrain from doing) something in the future does not, by itself, give the promisor even the opportunity to lie. But if a promise not only puts the promisor under an obligation but also says that such-and-such is the case, then it too can be a lie. The idea is familiar in literature and popular culture. Consider the following episode from The Frog Prince: “I don’t want your clothes, your pearls and jewels, or your golden crown,” the frog replied. “But if you would love me and let me be your companion and playmate, and let me sit beside you at the table, eat from your little golden plate, drink out of your little cup, and sleep in your little bed—if you would promise all that, I’ll dive down and retrieve your golden ball.” “Oh yes,” [the king’s daughter] answered, “I’ll promise you whatever you want if only you’ll bring back the ball!” However, she thought, What nonsense that stupid frog talks! He just sits in the water croaking with the rest of the frogs. How can he expect a human being to accept him as a companion?4

The princess has lied to the frog—she has misrepresented her intent to be his friend. Her perfidy is not so different from Penelope’s toward the suitors. During Odysseus’s long absence, Penelope promised that she would announce her choice among them after she had finished weaving her father’s funeral canopy, though every evening she undid the work of the previous day.5 Another example can be found in The Producers, where Max Bialystock knowingly sells more

3

4

Introduction

than 1,000 percent of the interest in Springtime for Hitler. Bialystock used his promises to deceive his investors, since he could not have intended to give each a full return on the investment in the event the play made a profit. And finally, as one of our children pointed out, in Jurassic Park III, the Kirbys never intended to keep their promise to fund Dr. Grant’s research in exchange for an aerial tour of Isla Sorna but meant all along to use the opportunity to rescue their teenage son Eric, who was stranded on the treacherous island after a paragliding mishap. We call this category of falsehoods “promissory misrepresentations” or “insincere promises.” (They are also sometimes referred to as “lying promises.”)6 Anglo-American law does not ignore the idea of promissory representations. An oft-forgotten corner of the law, the doctrine of promissory fraud, provides an entry into the idea that promises can say things. The doctrine recognizes that a promisor, by the very act of promising, typically communicates that she intends to perform her promise. That representation concerns an existing fact—as Lord Bowen put it in an early promissory fraud case, “[T]he state of a man’s mind is as much a fact as the state of his digestion.”7 By saying something about the promisor’s present intent, the act of promising creates the opportunity to lie. If a court finds that a defendant-promisor did not intend ab initio (at the time of promising) to perform her promise, it can subject her to both compensatory and punitive damages under the doctrine of promissory fraud or even sentence her to prison under the corresponding crime of false promise.8 But the doctrines of promissory fraud and false promise are not without their difficulties. For one thing, it’s notoriously difficult to figure out what a defendant-promisor’s intent was at the time of promising. Did the promisor breach because she never intended to perform, or did she simply change her mind? Did the townspeople intend to stiff the Pied Piper when they hired him, or did they hit on the idea only after the rats were gone? When Vice President Bush said “Read my lips: No new taxes,” did he misrepresent his present intent, since he knew that the fiscal situation might well require new taxes, or did an unexpected downturn in the economy cause him to change it? More deeply, the teachings of Oliver Wendell Holmes suggest that the legal act of promising might not imply an intent to perform. We can give Kant and the moral philosophers their due and allow that, as a general matter, it is morally wrong to make a promise one does not intend to perform. But as Holmes argues, we need to distinguish between the principles of law and those of morality.9 That something is a moral wrong does not, in itself, entail that it should be a legal wrong. And we might follow Holmes even further and argue

Introduction

that, while considerations of “a state of the individual’s mind, what he actually intends,” are essential to morality, they are often irrelevant in the law.10 A contract, for instance, is not so much a matter of the parties’ intentions as the objective meaning of their words and “the duty to keep a contract at common law means a prediction that you must pay damages if you do not keep it,—and nothing else.”11 Such observations raise serious questions about the legitimacy of the action for promissory fraud. If matters of intention are the province of morality, not law, why should the law care about a promisor’s intention at all? And if, in the eyes of the law, a promise is no more than an agreement to perform or pay damages,12 how can we conclude that it implies an intention to perform, rather than an intention to perform or pay damages? It seems that a Holmesian would be unlikely to embrace the doctrine of promissory fraud.13 But Holmes the jurist did, and with a vengeance. In Bailey v. Alabama,14 Justice Holmes voted alone in dissent to uphold an Alabama statute criminalizing insincere promises: “[W]hat it purports to punish is fraudulently obtaining money by a false pretense of an intent to keep the written contract. . . . It is not necessary to cite cases to show that such an intent may be the subject of a material false representation.”15 Giving callously short shrift to Alabama’s tendency to enforce this statute exclusively against African-Americans,16 Holmes justified the vote with the argument that “[b]reach of a legal contract without excuse is wrong conduct.”17 What could be further from the Holmesian notion of contract? If a promise to the scholar Holmes authorizes the promisor either to perform or to pay damages, how can breach be conceived of as “wrong conduct”? And here Holmes the jurist seems to be recurring to the very moral precept of pacta sunt servanda (agreements are to be kept) to justify the crime of false promise that Holmes the scholar would seem to reject. Holmes the scholar presents a view of contracts that appears to preclude such moralistic arguments and even the very doctrine of promissory fraud, while Holmes the jurist employed such arguments to justify his vote to uphold a statute criminalizing false promise. Now there are almost certainly ways to resolve this seeming contradiction in the Holmesian corpus.18 Nonetheless, the prima facie tension should give us pause. Promissory fraud is universally understood as occurring only when a promisor enters into a contract without intending to perform. But why should we require an intent to perform? Why shouldn’t it be enough if a promisor intends to perform or pay damages? Or more generally, why should the law care about the promisor’s intentions at all? If the road to hell is paved with good intentions, then bad intentions may lead to value-creating contracts. The doctri-

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Introduction

nal answer is that every promise says that the promisor intends to perform—the law requires that a promisor intend to perform because her very act of promising represents that to be the case. But this answer begs the question. If every promise represents an intention to perform, this is at least in part because the law insists that it does. The existing doctrine of promissory fraud doesn’t allow a promisor to say anything else, for it threatens those who might with punitive damages. Why not allow a promise to say no more than that the promisor has an intention to perform or pay damages, or that she doesn’t affirmatively intend not to perform? Or why not allow some promises to say nothing about the promisor’s intentions? These are questions that almost never get asked, either by courts or by commentators.19 While a fair amount of intellectual energy has been expended on doctrines like mistake and impossibility, contract theorists have, in recent years, had very little to say about promissory fraud.20 Similarly, promissory fraud receives relatively little attention in the typical first-year contracts (or torts) textbooks and is almost never taught in first-year torts or contracts courses.21 Even U.S. Supreme Court justices may forget that it is wrong to make promises that you don’t intend to keep. In 2003, Justice Antonin Scalia admitted to buying a round-trip ticket, to get back from his infamous duckhunting trip with a Supreme Court litigant, without any intention of using the return portion—even though the airline contract expressly prohibited throwaway ticketing.22 Yet in many jurisdictions, claims of promissory fraud are more common than invocations of either the mistake or the impossibility doctrines. Among the forty-four states that between 1992 and 2002 unequivocally recognized the action for promissory fraud, in thirty-four there were more reported cases of promissory fraud than of impossibility.23 In ten of those states—Alabama, Arkansas, California, Connecticut, Illinois, Kentucky, Michigan, North Dakota, South Carolina, and Tennessee—there were more cases involving claims of promissory fraud than cases involving mistake or impossibility combined. And the empirical prevalence of promissory fraud is hardly surprising. Alleging promissory fraud is one of the few ways that an aggrieved promisee can seek punitive damages for breach of contract. It is also one of the few ways to enforce promises that would otherwise be unenforceable because of the statute of frauds or the parol evidence rule. Promissory fraud is an important cog in the apparatus of contract law, yet no one has stepped back to examine its function in and effects on the workings of the mechanism as a whole.

Introduction

WHY CARE ABOUT INSINCERE PROMISES?

Having noticed that promises can say something about the promisor’s intention to perform or the probability of performance, the first Holmesian question is why the law should take notice of such representations. The action for breach of contract protects a promisee’s entitlement to the promisor’s performance by ensuring him compensation in the case of her nonperformance, typically in the form of expectation damages. The action for promissory fraud and the crime of false promise protect the promisee’s entitlement to the promisor’s initial intent to perform by threatening insincere promisors with punitive damages and even criminal sanctions. Why do we need this additional protection for the entitlement to promisor sincerity? Indeed, why do promisees even care whether or not a promisor intends ab initio to perform her contract? Chapter 4 considers these questions in depth. Our main conclusions are these. If a promisee’s entitlement to performance were truly protected by fully compensatory damages, then at the time of promising he would not care whether the promisor intended to perform, for he would expect to be made whole in the case of nonperformance.24 The primary reason why promisees care about promisor initial intent—and the reason why the law correctly protects the promisee’s entitlement to truthful representations of that intent—is that breach-of-contract damages are not fully compensatory.25 It is a familiar fact that contract damages in the United States typically do not compensate for litigation costs, for speculative damages, and for emotional and other nonpecuniary damages, and that they don’t compensate at all if the promisor is judgment proof. And, of course, there is always the chance that a meritorious breach-of-contract claim won’t prevail in court. In the real world, where disappointed promisees often are not made whole, a promisee who at the time of promising must decide whether or not to undertake the costs of reliance has a natural interest in the probability of performance. That’s why information about the promisor’s intentions is material. In this world of subcompensatory damages, promisees care about promisor intent because it is crucial for determining the probability of performance. From this perspective, the doctrine of promissory fraud is a close cousin to the law of bad-faith modification.26 Were there true expectation damages, a promisor could not press for more favorable terms by threatening to breach. Her threat would not be threatening, since in a world of fully compensatory damages, the promisee would be indifferent as to whether or not the promisor

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8

Introduction

performed. It is only because damages in the real world are likely to be subcompensatory that promisees worry about the prospect of breach. And it is for this reason that the law properly grants heightened protections against badfaith modification. In the same way, subcompensation causes promisees, when they are deciding whether or not to rely, to care about whether or not the promisor intends to perform. And this is the reason the law grants them an entitlement to truthful statements as to the promisor’s initial intent. Both promissory fraud and the prohibition on bad-faith modification substitute for the real-world shortcomings in implementing true expectation damages. But that is not the only use a promisee can make of credible information about promisor intent. A promisee can also use it to determine how much to invest in precautions against the possibility of nonperformance and to spend in ways that will increase his profits if the promisor does perform. The more likely a promisor is to perform, the fewer precautions a promisee needs to take against her nonperformance and the more he should invest in actions that will increase his profits in the case of performance. Breach-of-contract remedies alone do not secure these benefits. In this way, the law of promissory fraud corrects for shortcomings in the structure and implementation of contract remedies. Promissory fraud is not a doctrine where tort principles just happen to overlap contractual behavior. Rather, legal liability for insincere promising has a well-defined function within the apparatus of the law of contracts. It promotes the credible transfer of information about the promisor’s intentions, information that can tell a promisee whether it is in his interest to enter into the contract, with whom he should contract, and how much he should invest in reliance. In all these ways, the law of promissory fraud works to increase efficiency in contracting.27

THE LAW OF INSINCERE PROMISING

To say that the law should back up what promises say by holding insincere promisors liable for their falsehoods is not yet to say just how that should be done—how legal institutions should determine what a given promise said, whether it was false, whether the promisor acted culpably in making it, and what the appropriate remedy is. A major project of this book is to answer these questions as well. While we think it is a good thing that Anglo-American law generally recognizes the representational dimension of promising—both in the civil action for promissory fraud and in the crime of false promise—we believe that the existing regime suffers from serious deficiencies. As a matter of seman-

Introduction

tics, courts have failed to recognize the many things that a promise can say or not say. As a matter of proof, insufficient attention has been paid to the evidentiary basis for legal findings of promissory misrepresentation. And as a matter of policy, more thought should be given to the appropriate sanctions. Problems with Current Law of Insincere Promising

In order for a court properly to conclude that a promisor made a material promissory misrepresentation for which she should be held liable, it must make three key inferences: first, it must decide what the promisor said with her promise, explicitly or implicitly; second, it must ascertain whether, at the time of promising, that representation was true; and third, it must determine whether the promisor made the promissory misrepresentation in question recklessly or knowingly, that is, with the scienter necessary for punitive sanctions. We call the investigation into what a promisor said the “representation inquiry,” into the truth of her representation the “veracity inquiry,” and into whether she acted culpably in making it the “scienter inquiry.” Courts have generally failed to appreciate the complexities that underlie each. Difficulties in determining what a promise says have been papered over by adopting a simple (and, we shall argue, simplistic) mandatory rule that, in the words of the Second Restatement of Torts, “a promise necessarily carries with it the implied assertion of an intention to perform.”28 We call this the “categorical interpretation.” There are three problems with the categorical interpretation. The first is that its exclusive emphasis on what a promise says about the promisor’s intent to perform tends to obscure other things that promises say, particularly about the probability of performance. While a promisor can say something about the probability of her performance by saying something about her intention to perform, this is not the only way she can do so. For instance, in some contexts the act of promising can also represent that the promisor is so likely to perform that the promisee can reasonably rely on her doing so. This can be the case where there is a special relationship of trust between the contracting parties and where the promisee risks a great deal in the case of nonperformance. Think about a grown child’s promise to care for an elderly parent in exchange for title to his house. Such a promise implies not only that the promisor intends to perform but also that she is so likely to do so that it is in the parent’s interest to rely on it. Such promises represent more than the categorical interpretation would attribute to them. In this respect, the categorical interpretation is underinclusive.

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Introduction

The second problem is that, in adhering to the categorical interpretation, courts assume that there is only one thing a promise can say about promisor intent. Here we return to the Holmesian idea that some promises might represent an intention to perform or pay damages, or even say nothing about the promisor’s intent.29 Both alternatives suggest that a promise can say less than the categorical interpretation would allow. Thus a law-school applicant who has not yet heard from her first choice but pays a nonrefundable deposit to her safety school does not misrepresent her intent to enroll, for her promise does not say that at present she intends to perform. Because the categorical interpretation requires just this representation, it is also overinclusive. Finally, the categorical interpretation’s lack of a nuanced understanding of what promises say can lead to a failure to see the possibility of insincere promising in pure option settings. Suppose Leona enters into an express option contract with Donald whereby she agrees that at year’s end she will either buy Donald’s land for $100,000 or pay him $5,000. Notwithstanding the categorical interpretation, no court would find that Leona’s promise implicitly represented a present intent to buy the land, for the agreement expressly gives her the Holmesian option of taking or paying. One might therefore conclude that such “take-or-pay” contracts foreclose the possibility of promissory-fraud liability. But this result is underinclusive. What if Leona enters into the option contract with an affirmative intention not to buy the land and only wants the option to prevent a competitor from buying it? Even though Leona doesn’t represent that she intends to exercise her option, her take-or-pay promise seems to imply that she doesn’t intend not to exercise it. On the basis of this latter representation, Leona should be subjected to promissory-fraud liability. Because the categorical interpretation doesn’t recognize the distinction between not intending to perform and intending not to perform, it cannot capture this situation.30 In addition to oversimplifying the representation question, courts have tended to neglect important aspects of the veracity inquiry, which asks whether or not the promissory representation was true. If we assume the categorical interpretation, the key question is whether, at the time of promising, the promisor intended to perform. Courts frequently observe that breach is insufficient to prove that the promisor never intended to perform,31 but one searches in vain for a general account of what other types of evidence are relevant to determining a promisor’s initial intent or wherein the probative value of that evidence lies. While the cases demonstrate a visceral understanding that facts like lack of changed circumstances, repeated similar breaches, and the promisor’s knowledge of impossibility can all evince an initial intent not to perform, they

Introduction

have failed to articulate the broader principles that govern the veracity inference. In their adherence to the categorical interpretation, courts have also tended to neglect other questions relevant to determining the truthfulness of the representation—like whether at the time of promising the promisor was so likely to perform that it was in the promisee’s interest to rely and, more generally, what the objective probability of performance actually was. We argue that the latter is significant even where a representation of an intent to perform is at issue, since intent is material only because it says something about the likelihood of performance. Thus a purchaser who, unbeknownst to the seller, is insolvent might overoptimistically intend to pay for the goods, even though the actual chance of her doing so is considerably less than her represented intent to perform suggests. The seller has been misled, yet we find some courts saying that intent is all that matters and concluding that there was no misrepresentation.32 Finally, as to the question of whether the promisor acted culpably in making her promissory misrepresentation—the scienter inquiry—many jurisdictions simply fail to impose any scienter requirement at all. When it comes to the generic action for deceit, courts are clear that not every misrepresentation counts as fraud. In order to incur the most significant legal liability, a promisor must make her misrepresentation knowingly or recklessly. But courts tend to get confused when asked to apply this principle to allegations of insincere promising, since intent to deceive is so closely related to intent not to perform. We thus find a running together of the scienter and the veracity inquiries, based on the assumption that if a promisor misrepresents her intention, that misrepresentation must be intentional. The problem is that, while it is virtually axiomatic that a person knows what she does and does not intend, it is not true that every misrepresentation of intention is perforce an intentional misrepresentation. To think otherwise is to overlook cases where a speaker is mistaken as to the meaning of her own words. Suppose, for example, that in Connecticut a promise to build a swimming pool legally implies a promise to install a filtration system. Imagine Melita, a Massachusetts contractor, does not know this default interpretation and does not realize that by promising to build for Joe a Connecticut pool, she is also promising, and therefore representing her intention, to install a filter. If Joe then sues for failure to install the filter, we might expect Melita to testify that she did not intend to install a filter in order to argue for a different interpretation of the terms of the contract. But if Joe has also claimed promissory fraud, then her testimony is evidence of a promissory misrepresentation—her actual intent didn’t

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Introduction

correspond to what (according to Connecticut law) her promise said she intended. Sensitivity to the separate scienter requirement indicates why Melita should not be held liable—this is a case of mistake, not fraud. Yet we find courts treating such defendant admissions of no intent as sufficient, on their own, to prove promissory fraud.33 Failure to demand separate proof of scienter is a final way that the current practice is overinclusive, threatening innocent promisors with liability for promissory fraud. Recommended Reforms

The current contours of civil liability for insincere promising are deeply unsatisfactory. The categorical interpretation as the dominant mode of resolving the representation inquiry is too simplistic a picture of what promises say. The veracity inquiry is undertheorized and incomplete. The scienter inquiry is largely ignored. We recommend the following core reforms. The representation inquiry. When it comes to interpreting what a promise said, we reject the categorical interpretation and propose a system of default representations that allow promisors, by using appropriate words, to send stronger or weaker signals both about their intent and about the probability of their performance. But there should be a mandatory minimum representation: every promise says at least that the promisor does not have an affirmative intent not to perform (which is not to say that she intends to perform). Once we give up on the immutable categorical interpretation, we have to ask how courts should go about interpreting what a promise says about the promisor’s intentions and the probability of her performance. We argue for a dual representational default—unless the promisor opts out, the act of promising implicitly represents something about both the promisor’s intent and the likelihood of her performance. Absent evidence to the contrary, courts should assume that a promise represents an intention to perform. What the categorical interpretation takes as a mandatory interpretive rule, we read as an interpretive default. But we would go further. First, unless there is evidence otherwise, courts should interpret the representation of an intention to perform as meaning that there is at least a 50 percent chance of performance. Cashing out the intent representation as “more likely than not” both simplifies the veracity inquiry and highlights what is material in a representation of intent, which is what it says about the objective probability of performance. Second, unless the promisor expressly warns otherwise, courts should assume that a promise says

Introduction

that the promisor does not believe the probability of her performance is so low that it is not in the promisee’s interest to rely. This is not to require every promisor to guarantee the promisee a benefit from the bargain. But it is to insist that, unless the promisor indicates otherwise, her promise says that she does not have information that it is not in the promisee’s interest to rely. These additional default representations tie promissory fraud more directly to what promisees care about—the probability of performance. Still, if we left the representation inquiry at this, we would not be too far from the categorical interpretation. By changing that mandatory rule into a default, however, we give promisors the ability, within certain bounds, to say either more or less than our default representations. First, some promises say more. At times, it is valuable for a promisor to assure the promisee that there is an especially high probability of performance. Witness the old Federal Express ad: “When it absolutely positively has to get there overnight.” Or consider FedEx’s current assurance that its “Custom Critical” service delivers 96 percent of its packages within fifteen minutes of the promised time.34 These promissory representations are especially relevant when the promisee will incur significant uncompensated damages in the case of nonperformance, so that he requires greater assurance than the default representation provides. Where this is so, we would back up either a promisor’s express statement of the probability of performance (“96 percent on time”) or her assurance that the probability is so great that the promisee can safely rely on it (“When it absolutely, positively . . .”) with a legal guarantee. Second, courts should allow promisors to say less than the representational defaults. In particular, it is desirable that courts allow promisors to make Holmesian promises (we shall later call these “opaque” promises), which allow that the promisor may intend to perform or pay damages. More precisely, we would allow promisors to opt out of the default representation of a simple intention to perform and permit them to promise even when they have a conditional intention (an intention to perform if such and such is the case) or a disjunctive intention (an intention to perform or to do so-and-so). Such promises are similar to option contracts and can be mutually beneficial. Thus, in contrast to the categorical interpretation, we would have the law facilitate a promisor’s ability to say different things about her intentions and the probability of her performance. In doing this, we find ourselves somewhat at odds with one reading of the Gospel according to Matthew. In his Sermon on the Mount, Jesus advised: “Do not swear at all, either by heaven . . . or by

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Introduction

earth. . . . Simply let your ‘Yes’ be ‘Yes,’ and your ‘No,’ ‘No’; anything beyond this comes from the evil one.”35 Under the categorical interpretation, it is redundant to “swear to God [that you’ll perform] and hope to die [if you don’t].” We will show that, at least between humans, there is social value in facilitating a greater representational diversity about a promisor’s intent to perform and her assessment of the likelihood of her performance. There is, however, an important limit to how little a promisor should be allowed to say with her promise. We suggest that courts impose as a mandatory minimum that every promise says that the promisor does not currently intend not to perform. This mandatory floor would expose even explicitly Holmesian promisors (who may have conditional or disjunctive intentions to perform) to potential promissory-fraud liability. Recall our take-or-pay hypothetical, in which Leona promises either to buy Donald’s land for $100,000 or pay him $5,000 at year’s end. Imagine that the contract included the disclaimer: “Leona makes absolutely no representation with regard to her intent to exercise the option.” Such a clause attempts to opt out of all promissory-fraud liability and would, under our rule, be ineffective—at least if Leona were to make a Holmesian promise rather than purchase the option. Leona would still be liable for misrepresentation if a court subsequently concluded that, at the time of contracting, she had an affirmative intent not to perform. Our reason for this rule is that contracts in which the promisor affirmatively intends not to perform unnecessarily tax the courts and create no social value that cannot be realized in less costly ways. The veracity inquiry. The second crucial step in establishing a promissory misrepresentation is the veracity inquiry. Here courts need to be attuned to the content of the representation—implicit or explicit—whose truthfulness is being tested. Because by default the act of promising says something both about the promisor’s intent and about the objective probability of her performance, courts should seek to discover both. Of course these two questions are closely linked, and, we shall argue, the same evidence often tends to answer both. Our primary contribution here is in providing a critical taxonomy of the types of evidence that count toward an inference that the promisor never intended to perform or that the probability of her performing was particularly low. In Changing Your Mind, Allan Farnsworth excavates the role that changes of heart play in structuring contractual commitments.36 Our analysis explores the converse: When does a promisor breach without changing her mind—because

Introduction

she never intended to perform in the first place? Evidence that a promisor breached without any reason for changing her mind provides an important heuristic for assessing whether the promisor had an initial intent to perform her promise. Thus the most common form of evidence as to the promisor’s initial intent is the presence or absence of changed circumstances between promise and nonperformance. Breaching promisors accused of promissory fraud normally defend themselves by arguing that changed circumstances caused them to alter their intent to perform. And where there has been no significant change in the promisor’s situation between the time she promised and when she breached, it is natural to infer that she never intended to perform in the first place. The logic of changed circumstances accounts for other sorts of evidence as well. Thus, for instance, a short time between promise and breach is also highly suggestive that the promisor never intended to perform—the less time before breach, the less time for a change of heart (and for something to happen to cause such a change). Repeated assurances of performance are evidence of the same sort, since they shorten the time between the last promissory representation and breach. And where a promisor makes absolutely no attempt to perform, this can indicate that she decided early against fulfilling her commitment. Whether or not nonperformance was the result of a postpromise change of heart can also be shown by evidence that directly pertains to the promisor’s initial intent. A promisor, for example, who knows her performance is impossible and ultimately breaches her promise because it continues to be so did not breach because of any relevant changed circumstance. A pattern of similar breaches can also be powerful evidence that changed circumstances did not cause a breach in the case at hand. Evidence that Harold Hill in the Music Man never trained a boys’ band, or that a Georgia funeral home never performed any of its three hundred cremation promises gives one the strong impression of an intent not to perform, regardless of the circumstances in a particular case. Finally, because most promises also say something about the actual chances of performance (in addition to what they say about an intent to perform), evidence of the objective probability of performance at the time of promising will also be relevant. Here we return to the credit purchaser, whose initial insolvency shows that even though she intended to pay, her promise misrepresented the chances she would do so. The veracity inquiry must consider evidence not only of the subjective fact of the promisor’s intentions but also of objective circumstances relevant to the likelihood of her performance.

15

16

Introduction

The scienter inquiry. The law should carefully distinguish the veracity inquiry, which is about what the promisor actually intended or the objective probability of her performance, from the question of scienter, which concerns whether she acted culpably in making the misrepresentation. This said, the two do overlap, since evidence of an intent to deceive can serve as evidence of an intent not to perform, and vice versa. Scienter is a place where motive evidence can be particularly relevant. We have been surprised to find defendants being found liable for promissory fraud even though they had no reason to make the alleged promissory misrepresentation. Thus, for instance, where a representative of the seller of time-shares misrepresents the company’s buy-back policy to an owner who has already purchased, this is most likely a case of mistake—perhaps negligent or even reckless, but probably not a knowing lie. Because the owner has already purchased, the company has nothing to gain from the misrepresentation. Yet such defendants have been found to have committed promissory fraud.37 A promisor has a reason to make a promise she does not intend to perform— or that she believes she is unlikely to perform—only if, at the time of promising, she expects to gain more from breaking her promise (factoring in the risk that she might have to pay breach-of-contract damages) than from performing, and only if she thinks that the promisee will not rely unless she misrepresents the chances of performance. Evidence of motive (or the lack of it) should be more systematically exploited in promissory-fraud cases. In fact, it is probative as to all three of the central elements: the objectively reasonable meaning of the promisor’s words, the promisor’s intent with respect to performance and thereby also the probability of performance, and the promisor’s purpose in making the promissory misrepresentation.38 Strong evidence of motive minimizes the risk of fact-finder error, such as the possibility of mistaking a promisor’s true intent at the time of promising. The measure of damages. The scienter inquiry also points to a valuable distinction for setting appropriate damages. The size of damages should turn on whether a promisor’s misrepresentation was made knowingly or recklessly, as opposed to innocently or through mere negligence. At this point we need to take into account the possible secondary effects of liability. Because promissory fraud imports punitive damages into contract law, it threatens to have a chilling effect both on value-creating contracts and on efficient breaches. We therefore do not want to threaten promisors with supercompensatory liability for their reasonable, or even negligent, mistakes. That

Introduction

is, a promisor should be held liable for the most severe forms of damages only if her misrepresentation was either reckless or knowing. Fixing the scienter requirement here both creates a relatively high evidentiary bar, minimizing possible chilling effects, and targets those promisors who can avoid misrepresentation at the lowest cost. We thus propose that, when a promissory misrepresentation was made knowingly or recklessly, the promisee be given a choice between compensatory and punitive damages, where the latter are measured by the amount necessary to deter the promisor from engaging in such conduct (her expected gain from the misrepresentation multiplied by the reciprocal of the probability of enforcement). Since the claimant will choose the higher award, both compensation and deterrence are assured. Where a promissory misrepresentation was neither knowing nor reckless, we would still give the promisee the choice of either rescission or fully compensatory damages. The option to rescind follows from the analogy to mutual mistake: where both promisee and promisor were mistaken as to what the promise said, their misunderstanding should make the contract voidable by the disadvantaged party, here the promisee. Where the promisor has already breached, we also propose fully compensatory consequential damages, set at what might be called true expectation. Under this standard, the plaintiff is entitled to compensation for nonpecuniary and speculative damages, her attorney’s fees and all other reliance costs, whether reasonably incurred or not—greater recovery than is usually available in an action for breach of contract.

ROAD MAP

So ends our introduction to what we take to be the core contributions of this book. Our proposed law of insincere promising would simultaneously expand and contract legal liability. Where current practice is underinclusive we would expand liability—subjecting, for example, even explicit take-or-pay and Holmesian promises to scrutiny for an affirmative intention not to perform and recognizing that in some contexts a promise says that the promisee can safely rely on performance. Where current practice is overinclusive we would contract liability—insisting, for example, on an independent scienter inquiry and extending the use of motive evidence to reduce fact-finder error. Structurally, we seek to make the law of insincere promising more flexible and more functional. Flexibility can be achieved by moving from mandatory to default representations. Courts should not simply assume that every promise represents an intention to

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Introduction

perform and nothing else. We propose to make the doctrine more functionalist by tying the cause of action more directly to what promisees actually care about—the likelihood of performance, as opposed to promisor intent. The law should care about intent not for its own sake but only as a handmaid to an inquiry into the probability of performance. The rest of the book is structured as follows. We begin with some theory and in chapters 2 and 3 lay out an analytic framework for thinking about the different things that promises can and do say, about how promises can be false, and about when promisors should be held responsible for such falsehoods. We then turn to legal issues and, in chapter 4, provide a detailed analysis of why the law should care about insincere promising and of what form legal liability should take. Chapters 5 and 6 critically discuss the sorts of evidence that courts should use to establish what a promise said, whether what it said was false, and whether the promisor acted culpably in saying it. In chapter 7 we explore related civil wrongs, which include nonpromissory misrepresentations of intent and false predictions, preformation and postformation promissory insincerities, and insincere promises where there is no enforceable contract. Chapter 8 provides an empirical account of the use and abuse of the crime of false promise. Chapter 9 contains some ideas about teaching promissory fraud. And we summarize what we consider the most important theoretical results in the Conclusion. An overview of our nuts-and-bolts reform recommendations can be found in appendix A, “Draft Prestatement of the Law of Insincere Promising.” In appendix B we put our toes into the comparative-law waters and suggest some hypotheses about how other legal traditions might approach the problem of insincere promising.

Chapter 2 How to

Say Things with Promises

A central claim of this book is that promises are used not only to undertake obligations but also to say things about the world—such as that the promisor intends to do the act promised. This chapter provides a theoretical framework for thinking about promises as both doings and sayings. We approach the idea from our own area of expertise, which is the law. The action for breach of contract emphasizes the more familiar aspect of promises—the fact that promises are used explicitly to undertake obligations. The civil action for promissory fraud and the crime of false promise focus on the other side, on what promises say. These actions provide our ingress into the idea of promissory representations. The first thing a person alleging any sort of fraud—promissory or not—must prove is that there was a falsehood, some sort of misrepresentation. In order for there to be a misrepresentation, two conditions must be met: there must be a representation that such and such is the case and that representation must be false. When presented with an allegation of fraud, a court must therefore engage in two separate inquiries. The first is interpretive and asks what, if anything, was said. 19

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How to Say Things with Promises

We call this the representation inquiry. The second is a matter of determining whether the world was as it was said to be—whether the representation was false. We call this the veracity inquiry. In this chapter we approach what promises say by looking at how courts faced with claims of insincere promising have engaged in the representation inquiry. We begin to explore the veracity inquiry, together with questions of scienter, in chapter 3. Most courts assume that every promise represents an intention to perform and nothing else. We call this majority view the categorical interpretation. In most cases, this assumption remains unspoken, though it can be seen at work in the fact that courts typically ignore the representation inquiry altogether. Under the categorical interpretation, the mere fact that the defendant made a promise is enough to prove that she represented an intention to perform. Those courts that do explicitly address the representation question generally go no further than an explicit affirmation of the categorical interpretation,1 which has also been enshrined in the Second Restatement of Torts in the rule that “a promise necessarily carries with it the implied assertion of an intention to perform.”2 We argue in this chapter that the categorical interpretation is both overinclusive and underinclusive. It is overinclusive because it is not clear that every promise represents a present intent to perform. The Holmesian conception of contract suggests that a promise can represent an intention to perform or pay damages. Or a promisor might, at the time of promising, expressly disavow any representation of an intention to perform. In these cases, a promise says less than the categorical interpretation would allow. The categorical interpretation is underinclusive because its emphasis on the promisor’s intention at the time of promising obscures what is really material, namely, what the promise says about the objective probability of performance. From a consequentialist perspective, this is the crucial content of the representation that the promisor intends to perform, since it is the probability of performance that determines whether it is reasonable for the promisee to rely on the promise. But saying that one intends to perform is not the only way to say something about how likely it is that one will perform. A promisor might explicitly disclose what the probability of her performance is. One can even imagine a promissory practice in which, absent explicit statement to the contrary, every promise implicitly represented not an intent to perform, but that there was at least, say, a 90 percent chance of performance. A promise can also say that the promisor is so likely to perform that the promisee can safely rely on it—that it is in his best interest to rely—and it can do this explicitly or implic-

How to Say Things with Promises

itly. Adherence to the categorical interpretation causes courts to neglect these other possible forms of promissory representation.

REPRESENTATIONS ABOUT THE PROMISOR’S INTENT TO PERFORM

A promise is, first and foremost, not a saying but a doing—it accomplishes something in the world. When a person promises to do something, her speech act is not so much meant to describe the world as to change it, by creating new duties or obligations for herself. Promises are therefore paradigmatic examples of what philosophers of language, following J. L. Austin, have called performatives—words that are used not to describe the world but to act in and on it.3 What a promise does first and foremost is obligate the promisor to do the act promised. Typically this means that if the promisor fails to perform, she will be liable to moral censure and other sanctions, legal or otherwise. We shall call adopting such a normative status “committing” oneself.4 Thus a speech act by A of the type “I promise to x” entails the performative force: PER A is committed to xing, that is, A has adopted a certain normative status, according to which she will be subject to censure and/or other sanctions if she does not x. To say that a promise is a paradigmatic performative is to recognize that in most cases, the most salient aspect of making a promise is PER.5 That said, it would be wrong to think that this is all that a promise does, that it doesn’t also say something about the world. Any given speech act can do or say any number of things, depending on the linguistic conventions of the language community in which it occurs. Austin called speech acts that describe the world constatives. The crucial point here is that a single speech act can have both performative and constative dimensions—as when one performs the act of ordering in a restaurant by using the declarative sentence “I want two eggs over easy.” It is useful to think of this in terms of the multiple entailments—both sayings and doings—that a given speech act can have. The various entailments of a speech act are one way of getting at its meaning.6 The categorical interpretation is based on the observation that in our everyday language practice, promises have not only a performative use but also a constative one—that they also say, or represent, that something is the case. The statement “I promise to x” typically represents that the speaker intends to x.

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That is, in our everyday language practice, A’s speech act of the type “I promise to x” typically entails the representation: REP1

A intends to x.7

We shall call promises that entail REP1 positive promises. A positive promise can be the result of the promisor’s explicit positive promissory representation, such as “I intend to perform.” Or, as the categorical interpretation holds, it can be implicit in the very act of promising. Legally speaking, PER creates potential liability for breach of contract; REP1 creates potential liability for promissory fraud.8 The categorical interpretation holds that every promise is a positive promise. This is rooted in an intuition about the way promises function in our everyday language practice. But PER and REP1 are logically independent. We often express intentions without committing ourselves in the sense of promising. And there is no contradiction in a person committing herself to doing something in the technical sense of PER, though she does not actually intend to do it. We can thus imagine promissory practices in which a promise commits the speaker to doing the act promised but does not represent an intention to perform. We shall consider two such possible practices, which we will call “blank” and “opaque” promises. Despite many courts’ statements that every promise represents an intention to perform, it is not obvious that they would ignore a promisor’s explicit disavowal of that representation.9 If a promisor said something like “While I consider this promise to be legally binding, I do not represent anything about my intention to perform,” then we’d be hard pressed to say that she represented an intention to perform. We call promises that say nothing about the promisor’s intention blank promises. If A’s statement of the type “I promise to x” is a blank promise, then it entails PER but no analogue to REP1. A promisor can make a blank promise either by explicitly disavowing any representation regarding her intentions, as above, or because local linguistic conventions dictate that promises are blank. A promisor who makes a blank promise cannot commit promissory fraud in the traditional sense of the term. Because she says nothing about her intentions with respect to performance, her promise cannot misrepresent those intentions— even if, at the time of promising, she intends not to perform. One might want to attribute to Holmes the view that the law should treat all promises as blank. This is perhaps the most obvious reading of his famous and much reviled statement, “The duty to keep a contract at common law means a

How to Say Things with Promises

prediction that you must pay damages if you do not keep it,—and nothing else.”10 And such a reading seems consistent with Holmes’s general view that a promisor’s intentions are relevant only to the moral evaluation of her actions, not to their legal characterization.11 But we should be careful about reading too much into the contractual view that has (possibly falsely) been attributed to Holmes.12 Holmes’s concern in these passages is not the representational content of promises—what they might or might not say about the promisor’s state of mind (REP1)—but the law’s understanding of the performative force of promises (PER), which, he wants to say, has nothing to do with the promisor’s morality or immorality. Blank promises are not the only alternative to positive promises. A promisor might say something about her intentions with respect to performance, but less than a positive promise would say. We will use the term opaque to describe promises that do not say that the promisor has an affirmative intention to perform but do say that she does not have an intention not to perform. In order to understand the meaning of an opaque promise, one needs to be clear about the difference between not intending to do something and intending not to do it.13 In everyday parlance, speakers often run the two expressions together. A sentence like “I don’t have any intention of marrying Bob” typically means that the speaker intends not to marry Bob. But there are circumstances in which it makes sense to say that a person does not intend to do something even though she does not have an intention not to do it. The most obvious is where someone simply has no attitude with respect to that act, where she hasn’t thought about it. Before reading this sentence, you probably neither intended to go up onto the roof and balance a chair on your forehead nor intended not to—the idea simply hadn’t occurred to you. Another possibility—one more central in the analysis of promissory fraud— is the person who intends to do something only in the event that something else happens. For example, we don’t expect that a person who purchases an option to buy necessarily intends to buy. But nor do we expect that she intends not to— after all, she bought the option. It is much more likely that she has a conditional intention—she intends to buy if some condition is met before the option expires. Conditional intentions too reside in the logical space between not having an intention to do something and having an intention not to do it. An opaque promise—like the typical option-to-buy promise—says that the promisor does not intend not to do the act promised, though it does not represent that she intends to do it. Thus if A’s statement of the form “I promise to x” is an opaque promise, it entails PER and:

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REP2 A does not intend not to x (which is not to say that she intends to x). Like blank promises, a promise can be opaque either because the promisor puts explicit limits on what she says or because local practice is to treat promises as opaque.14 Opaque promises stand in a close relationship to conditional promises. They are most likely to appear where a promisor is aware of some eventuality, which, if it occurs, will result in her nonperformance, and chooses not to disclose that condition to the promisee. Such a promisor has a conditional intention of the form: CI

If C, I shall x.

The condition of performance can relate to the direct costs of performance (a manufacturer’s intent to perform only if she can resolve a collective bargaining dispute in time to do so) or to opportunity costs (a seller’s intent to deliver the promised goods so long as she doesn’t get a better offer). In Hillcrest Center v. Rone, for example, the defendant, Seibert, had promised the claimants, the Rones, that if they entered into a commercial lease, she would purchase the adjacent lot to provide them additional parking.15 The court found, however, that “the evidence was sufficient for the jury to infer that Seibert intended, from the beginning, to induce the Rones to execute the lease contract, yet never intended to purchase the adjacent lot to provide the additional parking unless she was able to secure a tenant for the proposed building to be built on the adjacent lot (a ‘contingency’ Seibert never communicated to the Rones).”16 Because Seibert made a positive promise to provide parking, she misrepresented her intention. Had she made an opaque promise, she would have avoided that misrepresentation. An opaque promise would not have represented an affirmative intent to perform, but only that Seibert did not intend not to perform. Because she had an intention of the form CI, that representation would have been true. Now rather than making an opaque promise, Seibert might have avoided misrepresenting her intention by making the condition of her performance explicit. That is, she could have made a positive conditional promise. A conditional promise commits the promisor to do the thing promised just in case the condition is met. That is, A’s conditional promise of the form “I promise that if C, I will x” entails: PER C A is committed to x ing if C pertains, that is, A has adopted a certain normative status, according to which she will be subject to censure and/or sanctions if C pertains and she does not x.

How to Say Things with Promises

If A’s conditional promise is a positive promise, then according to the above analysis it also entails: REP1C

A intends that if C, she shall x.

If A has intention CI, then REP1C is true and she cannot be held liable for insincere promising. The difference between the typical opaque promise and conditional promises is that the conditional promise gives the promisee information that the opaque promise withholds—the condition of the promisor’s performance. While there is a close relationship between conditional and opaque promises, not every opaque promise can be converted into a conditional one. First, consider a purchaser who is simply unsure of whether she wants to buy a piece of land. She neither intends to purchase nor intends not to purchase but conditionally intends to purchase if she decides that she in fact wants it. Such a purchaser could make an opaque promise without misrepresentation. She cannot, however, make a legally enforceable conditional promise. Her conditional promise would be of the form “I promise to x if I feel like it.” Prevailing doctrine treats such promises as illusory and therefore unenforceable.17 Second, a promisor might have good reasons for making an opaque promise even if she unconditionally intends to perform. She might, for instance, intend to perform but want to shield herself from liability for promissory fraud. In this case, a conditional promise would not be strictly false—she does intend that if C, she shall perform. But it would be misleading and beside the point—she also intends that if not-C, she shall perform. Any positive or conditional promise can be converted into an enforceable opaque promise without misrepresenting the promisor’s intention. But not every opaque promise can be converted into a conditional promise. These three types of promise—positive, blank, and opaque—do not exhaust the universe of possible promissory representations of intent. What a given language community can take a promise (that is, a speech act that entails PER) to say about the promisor’s intentions is limited by only our imagination and the law of noncontradiction. And even in our language community there are other representations.18 But positive, opaque, and blank promises make up the three basic alternatives for the legal interpretation of what a promisor can say about her intention to perform. The differences among them can be summarized in terms of the differences among their truth conditions—what attitude the promisor must have in order that the promise accurately represent her intent. A positive promise is true only if the promisor intends to perform. An

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How to Say Things with Promises

opaque promise is true only if the promisor does not have an intention not to perform. A blank promise cannot falsely represent the promisor’s intentions, regardless of whether she intends to perform, does not intend to perform, or intends not to perform.

CONDITIONAL INTENTIONS: FROM MARRIAGES TO MERGERS

Blank, opaque, and positive are the legally salient forms of promissory representations of intent, on which this book focuses. But we want to take a moment to acknowledge another analytic dimension of what promises say. The gap between what a promise does and what it says leaves room for conditional intentions that do not correspond to a promise’s performative force but nonetheless do not give rise to promissory misrepresentation, though the promise is neither blank nor opaque. As we noted above, a positive conditional promise represents a conditional intention to perform. A positive promise to x if C represents an intention to x if C. This has broad-ranging implications for the representational content of contractual promises, since under the doctrine of excuses, the legal duty to perform is conditioned on performance not becoming impracticable, illegal, or impossible.19 And that doctrine corresponds to our extralegal practice of promising. As John Rawls notes, “[I]f one says the words ‘I promise to do X’ in the appropriate circumstances, one is to do X, unless certain excusing conditions obtain.”20 We discuss this aspect of the representations of conditional intentions that correspond to conditional promises further in chapter 6.21 But even where the duty to perform is not conditional, there may be a range of conditional intentions to perform that are within the expectation of the parties. Notwithstanding the categorical interpretation, promisors are not expected to have an initial intent to perform no matter what happens in the future. In many contexts, a promise represents not a simple intention to perform but is compatible with certain conditional intentions—even though the duty to perform is not so conditioned. Suppose Sally, an independent long-haul trucker, agrees to drive Burt’s load of pork rinds from Little Rock to Hollywood, knowing that Burt absolutely requires delivery for a big party that Saturday. The price of gas is low, which is reflected in the price Sally charges, and no one expects it to go up soon. But Sally remembers the gas crises in the 1970s and, if asked, would tell you that if gas prices go up more than 20 percent, she will lose too much money on the job

How to Say Things with Promises

and choose not to perform. So long as Sally doesn’t have any reason to think that it’s particularly likely that gas prices will go up, her positive promise has not misrepresented her intent to perform. Her intention to perform conditional on the nonincrease of cost of performance is within the range of mutual expectations in her arm’s-length relationship with Burt. Things would be different, however, if Sally had an intention to perform only so long as the opportunity costs of performance did not increase. Suppose, for example, that if asked, Sally would tell you that if she got a better offer before the time of performance, she would certainly breach her promise to haul Burt’s pork rinds— despite the importance she knows Burt attaches to having them there that Saturday. There is a strong intuition that this second type of conditional intention is less acceptable than Sally’s intention not to perform if the price of gas goes up. A number of aspects about the above example bear mentioning. To begin with, Sally has no reason to think that gas prices will go up or that she will receive a better offer. In both the bad-news (gas prices) and the good-news (a better offer) cases, Sally’s intention is conditional not because she has any special reason to think the conditioning event will happen but because she has background knowledge (whether or not she’s reflected on the matter) about what she would do if such an event were to happen. These permissible hypothetical conditions are not particularly salient to the transaction. This is why, in the agreement between Sally and Burt, Sally’s bad-news conditional intention is not problematic. As a formal matter there will always be some changed circumstances between the moment of promising and the moment that performance comes due. To have bite, a positive promise must represent an intent to perform irrespective of most sorts of changed circumstances. (The intent to perform should not be tacitly conditioned on the appearance of sun spots that day.) But a positive promise does not necessarily represent an intent to perform “no matter what.” It may represent an intention subject to a limited range of conditions. So what exactly is this limited range? To our minds, there is an important difference between conditional intentions with respect to “good news” (for example, a better offer) and conditional intentions with respect to “bad news” (for example, higher costs of performance). In the agreement between Sally and Burt, the bad-news background intention is less problematic than the goodnews one. We suggest that in most business relationships, any adversity that would give a promisor the ability to enter into a good-faith one-sided modification should be the type of bad-news event upon which the promisor’s initial intent of performance could be conditioned without misrepresentation. It is

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telling that there is no equivalent doctrine of one-sided modification based on good-news changed circumstances. Good-news conditional intentions are more problematic than bad-news conditional intentions.22 That said, context plays a large role in determining which sorts of conditional intentions may permissibly accompany an unconditional duty to perform. Thus the traditional promise to marry includes the words “in sickness and in health, for richer and for poorer.” Even without those words, a hidden bad-news initial intent to divorce in the case of poverty would be incompatible with our culture’s understanding of a promise to marry and would constitute a promissory misrepresentation. A hidden good-news conditional intention to marry would be even more wrongful. Few people believe that their fiancés intend to marry them only so long as someone better doesn’t come along. On the other hand, Delaware corporate law requires target companies affirmatively to solicit better offers and to auction the firm to the highest bidder (once takeover becomes inevitable).23 Acquirers entering into a merger agreement understand that the target company has a duty before closing to consider, and even to solicit, subsequent better offers that may cause it to breach the merger agreement. Thus the target company may (indeed, must) have an extremely salient goodnews conditional intention to perform under a merger agreement without misrepresentation. In asking whether a good-news conditional intention would give rise to a promissory misrepresentation, it is helpful to ask whether the promisor has a duty, after entering into the initial promise, not to solicit alternative promisees. For example, in Chung v. Kaonohi Center Co., the Hawaii Supreme Court considered a case where, after the defendants had leased a commercial space to the claimants, the defendants continued to seek better offers, despite the claimants’ considerable expenditures in reliance on the lease.24 The court concluded that the claimants could recover damages for emotional distress, since “[t]he actions of [the defendants] were reprehensible and clearly amounted to wanton and/or reckless conduct sufficient to give rise to tort liability.”25 The defendant’s actions, under these facts, should also have given rise to an action for promissory fraud.26 This discussion suggests that the representational content of many promises can be even more nuanced than the definition given above of “positive promise” indicates. Rather than representing an intent to perform come what may, some positive promises represent an intent to perform that may be subject to a limited range of permissible conditions. Where this is the case, the represented intent to perform does not extend as far as the promissory duty. And the con-

How to Say Things with Promises

verse can also be true. Some positive promises may represent an intent to perform even if there are excusing changed circumstances—circumstances that extinguish the legal duty to perform. While this aspect of promissory representations is of analytic interest, we shall not emphasize it in our discussion of the law of promissory insincerity. Integrating the possibility of permissible nonsalient conditions on a promisor’s intent to perform would add another layer to an already complex account of what promises say. And the relevance of permissible conditional intentions can be captured in a perspicuous account of what a represented intention to perform says about the objective probability of performance, to which we now turn.

THE MATERIAL CONTENT OF A PROMISOR’S REPRESENTATION THAT SHE INTENDS TO PERFORM

The categorical interpretation, which holds that every promise is positive (represents an intent to perform), is not an essential truth about promising. As the discussion above demonstrates, we can imagine promises that do not represent an intention to perform. But it does reflect how we interpret promises in everyday, nonlegal contexts. We typically understand a promissory statement to imply that the promisor intends to do the act promised. Given that PER is logically independent of REP1, it is natural to ask why our linguistic conventions join the two. What function does the representation of an intention to perform serve in our everyday promissory practice? One way of answering this is to emphasize the moral force of a promise. As our formulation of PER tries to capture, the act of promising doesn’t subject the promisor to just any sanctions should she fail to perform, but often exposes her to moral censure. Not only is it costly to break a promise, it is also wrong. This finds expression in the traditional maxim pacta sunt servanda—agreements are to be kept. The moral force of promising may explain the presence of REP1 in much of our ordinary language practice. There is something anomalous about explicitly undertaking a moral obligation and at the same time intending not to comply with it. We can express this anomaly as an interpretive default in moral reasoning: absent strong evidence to the contrary, we understand the acknowledgment of a moral obligation to represent an intention to comply with it. To promise without intending to perform offends this default.

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While this explanation of why PER gets conjoined with REP1 may be correct as a matter of philology, it does not explain why courts should step in to enforce promissory misrepresentations of intent. Here Holmes’s thesis about the difference between the law and morality is surely correct: the mere fact that to promise to do something without intending to do it is morally wrong does not suffice as an explanation of why the law should punish it. Even the fact that a promisee can be misled by such a promise does not suffice. Courts allow actions for deceit only where the claimant justifiably relied on the supposed misrepresentation to his own detriment.27 The moral explanation does not provide an account of why a promisor’s intention is a material fact on which the promisee can justifiably rely. Nor does that explanation account for why the categorical interpretation is relevant to morally neutral promises. If promises were originally moral obligations, there have since developed purely legal forms of promissory obligation, where the sanctions for nonperformance do not include moral censure—the most obvious example being the arm’s-length business transaction. Nonetheless, we seem to find PER conjoined with REP1 in these contexts as well. A broader account of the relevance of promisor intent begins not with the moral valence of the act but with the use to which promises are put, the reasons why we make promises to one another. A person typically promises to do something in order to convince the promisee to act in reliance on her doing so.28 This is most obvious in bilateral promises for consideration, where the one party commits herself to performing her obligations in order to convince the other to perform his obligations, from which she stands to benefit. Alice promises to pay Bob $20 after he mows her lawn in order to convince Bob to mow the lawn. The point of the promise is to induce Bob to act in reliance on Alice’s future performance. But even gratuitous promises are typically made with this purpose. Alice might promise to do the dishes only in order to convince Bob not to do them himself. In order for a promisor to convince the promisee that he can rely on her doing the thing promised, she typically has to assure the promisee that she is likely to perform. Acting in reliance on a promise means undertaking costs. These costs are most apparent in contracts that contemplate sequential performance. If Bob has to mow the lawn before getting paid, then he won’t mow unless he believes that Alice is in fact going to pay him. But sequential contracts are only the most obvious example of a general phenomenon. Promisees also incur reliance costs by forgoing other opportunities, by undertaking projects whose profitability presupposes the promisor’s performance, and in a host of other

How to Say Things with Promises

ways. In order to find it in his rational self-interest to rely, the promisee will typically have to be persuaded that the promisor is likely to perform. Our thesis is that promissory representations of an intention to perform are used to convince promisees of just this. Promisors say that they intend to perform because doing so helps persuade promisees that the promisors will perform, that it is in the promisees’ rational self-interest to rely on their doing so. How great must the probability of the promisor’s performance be for it to be in the rational self-interest of the promisee to rely on her performing? The answer will depend on a variety of factors: the costs of the promisee’s reliance, his gain if the promisor does in fact perform, what compensation he expects to receive should the promisor fail to perform, and so forth. With some simplification, the following variables will be relevant to a decision by a promisee (B) to rely on the future performance of a promisor (A): Pp  CB  BB  D 

probability of promisor’s performance promisee’s cost of performance/reliance29 promisee’s benefit should promisor perform promisee’s expected damages should promisor not perform.

The rationally self-interested promisee will be willing to rely on the promisor’s future performance only if: value of the promisor’s performance, discounted by the probability of that performance



value damages in the case of non performance, discounted by the probability of nonperformance



promisee’s cost of performance

That is to say, it will be rational for B to enter into a contract only if he believes that: (1)

(Pp)(BB)  (1  Pp)(D)  (CB).

Economists refer to condition (1) as B’s “participation constraint.”30 In order to evaluate whether the promise is a good deal for him, a promisee will need information about all of the variables that figure into his participation constraint. In most cases—though by no means all—a promisee knows more going into a deal than the promisor does about his own costs of performance and reliance (CB), about his benefit in the case of performance (BB), and about

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the recoverable damages should the promisor breach (D). This is not the case when it comes to the probability of performance. The promisor typically knows more about the probability of her performance than does the promisee. Consequently, a promisee will be particularly interested in anything the promisor has to say about how likely it is that she will perform.31 If we solve (1) for the probability of the promisor’s performance, Pp, we arrive at the following as the necessary condition for the promisee’s reasonable reliance: C −D (1*) Pp  Pp *  B BB − D Pp* is the promisee’s participation constraint with respect to the probability that the promisor will perform. From here on out, when we refer to the promisee’s participation constraint, we mean just Pp*. A promisor who wants to convince the promisee that it is in his rational self-interest to act in reliance on her performing must convince him that the probability of her performance is greater than or equal to his participation constraint, that is, that Pp  Pp*. This rather abstract formulation can be illustrated with a few examples. Consider a sales contract, between a promisor-seller Alice and a promiseebuyer Bob, which requires payment (that is, Bob’s performance) in advance. The sales price is (CB ) $80 and Bob values the goods at (BB ) $100. We shall consider three different scenarios. Scenario 1: full expectation damages. Imagine first that the court is certain to award full expectation damages if Alice refuses to sell—awarding D  BB  $100.32 In this case, Bob should be indifferent as to whether or not Alice performs. If Alice performs, Bob’s costs will be $80, and he will receive goods that he values at $100, for a net gain of $20. If Alice breaches, Bob will already have paid $80 in performance costs, but he will receive $100 in damages, for a net profit of $20. This scenario represents the case of perfect expectation damages. Where expectation damages are perfect, Bob should not care whether Alice performs or not and will be indifferent to Pp. And, indeed, Bob’s indifference is reflected in the definition of Pp*. When D  BB, Pp* is not defined, indicating that there is no minimum probability of performance that is necessary to induce Bob’s participation. Scenario 2: subreliance damages. It is a familiar fact that where damages are less than expectation (that is, “subcompensatory”), promisees will no longer be

How to Say Things with Promises

indifferent as to whether the promisor performs. Subcompensatory damages can be caused by any number of factors, including the American Rule of no compensation for litigation costs, uncertainty about damages in the case of breach, and a reluctance to award damages for unobservable or “speculative” harms.33 For the purposes of our analysis, we simply assume that the court is expected to award less than the promise’s true value. In this scenario, we analyze a circumstance in which damages are not just below expectation (BB  $100), but are also below reliance (CB  $80). Specifically, we modify the first scenario by assuming that if Alice breaches, Bob can expect to receive on net only D  $60. Now if Alice performs, Bob can still expect a net profit of $20. But if Alice breaches and Bob collects damages, Bob will experience a loss of $20 ($80 performance costs less $60 in damages). If we solve for Bob’s participation constraint, we find that Pp*  .5.34 That is, it will be in Bob’s rational self-interest to enter into the deal only if the probability of Alice’s performance is at least 50 percent. In order to convince Bob to enter into the contract, Alice will have to convince him that there is at least a 50 percent chance that she will deliver the goods. Scenario 3: subexpectation but superreliance damages. The final scenario to consider concerns damages that are less than the promisee’s expectation interest but greater than his reliance costs. Continuing with our former assumptions about CB ( $80) and BB ( $100), imagine now that Bob expects net damages to be $90. For this intermediate level of damages, we find that Bob should be willing to participate in the contract regardless of the probability of Alice’s performance. Bob’s reliance costs are more than covered if Alice fails to perform, and Bob profits even more if Alice does perform. The nonbinding nature of the participation constraint is reflected in the value of Pp*, which for this scenario has a negative value, Pp*  1.35 Because Bob profits whether or not Alice performs, he is willing to participate even if the probability of performance is zero. This is not to say that when damages are in this range, Bob is indifferent as to whether or not Alice performs. When net damages equal $90, Bob earns twice as much if Alice performs as if she fails to perform ($20 as opposed to $10). While the probability of Alice’s performance is not material to Bob’s binary decision whether or not to participate in the deal, it might be very material to other decisions. Bob might insist, for example, on paying a lower price (CB  $80) if he believes that she is not very likely to perform. Or the probability of her performance might be material to how much Bob is willing to invest in

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other types of reliance to increase the value of that performance (BB  $100). Our bare-bones participation model illustrates the robust result that probability of performance is immaterial when expected damages are fully compensatory (that is, fully compensating expectation) and highly material when net damages fall below reliance. But the suggestion that probability of performance is immaterial when damages are subcompensatory but exceed reliance is an artifact of the model’s simplicity. We will argue in chapter 4 that the probability of performance remains material to promisee negotiation and postformation reliance decisions whenever damages are less than full expectation. The point of these observations is to get a more precise understanding of just what a promisor must convince a promisee of in order to persuade him to rely on her promise. A promisor’s assurance that she will perform suffices only if it convinces the promisee that the probability of her performance is greater than or equal to his participation constraint—when it convinces him that Pp  Pp*. Because the point of making a promise is normally to induce promisee reliance, the typical promisor has at the time of promising an interest in providing the promisee such assurance. But what counts as sufficient assurance will vary from case to case, depending, for example, on the promisee’s cost of performance, on his potential benefit in the case of performance, and on his recoverable damages in the case of nonperformance. Now one way a promise can function to assure the promisee as to the promisor’s future actions is, no doubt, its performative force (PER). Because the promisor exposes herself to censure and/or other sanctions should she fail to perform, she has an incentive not to break her promise. But this incentive can be very weak. In the case of promises that are not legally binding, the costs of nonperformance might be no more than moral censure and future distrust. In the case of legally enforceable contracts, enforcement is generally in the form of liability, rather than property rules (price rather than penalty), and is less than certain. It is a familiar fact of life that breach-of-contract damages often don’t give either promisors a sufficient incentive to ensure performance (that is, a sufficiently high Pp ) or promisees enough compensation to make them indifferent to the probability of performance. When PER does not provide a sufficient guarantee of the promisor’s performance to convince the promisee to risk reliance, the convention that a promise implicitly represents an intention to perform (REP1) is highly relevant. There is a close connection between having an intention to do something and the chance that one will do it. A person’s intention is a sort of thing that, in general, causes her to do the act intended; a person who intends to x is more likely to

How to Say Things with Promises

x.36 This means that by representing that she intends to perform, a promisor can communicate something about the probability that she will do so. And this is just the point of the representation. A promisor’s intention to perform is material only because it entails her being likely to perform, only because it provides the promisee crucial information for evaluating Pp. Now how exactly should we interpret “likely” in the previous sentence? That is, what does a person’s representation that she intends to do some act say about the chance that she will in fact do it? A few generalizations are possible. The fact that a person intends to do something does not mean she is certain to do it. We all know that intentions can fail, whether due to external causes or to a change of heart. But nor can the person who intends to do something believe that there is no chance of her intention succeeding. You may wish you could fly like a bird, but your belief that it is impossible means that you cannot intend to do so. Finally, if a person intends to do something, then it is more likely that she will do it than it would be if she did not have that intention, and a fortiori that she is more likely to do the intended act than if she intended not to do it. It is doubtful whether, as a general matter, more can be said than this. Having an intention to do something does not entail that one’s chances of doing it are at least eighty-twenty, sixty-forty, or even fifty-fifty. For one thing, our everyday understanding of what it means to have an intention simply isn’t so precise. For another, our assessment of how likely it is that an intention will succeed varies greatly depending on what is intended. Both speaker and hearer will typically know that an expressed intention to mow the lawn is much more likely to succeed than an expressed intention to climb Mount Everest. We might even imagine a person communicating an intention to do something quite difficult while acknowledging that she will probably fail to realize it. Consider the Olympic athlete who intends to win the gold but knows that the competition is tough or the smoker who, while lighting up a cigarette, says, “I’ve been intending to quit for years.” Such statements may accurately represent the speakers’ intentions, but the contexts suggest it is more probable than not that those intentions will not succeed.37 The probability of performance that an expression of intention communicates will be relative to the sort of act intended. Finally, that probability may also depend on the possibility of permissible conditions on the intent to perform (for example, bad-news conditional intentions), which we discussed in the previous section. Our common sense of the world tells us the likelihood of someone’s realizing a given sort of intention. When Alice represents to Bob that she intends to wash

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the dishes, Alice and Bob have a common understanding of the probability of her achieving that sort of intention. It is this common understanding that allows a promisor’s representation that she intends to perform to function as sufficient assurance for the promisee. The representation of the intention says something to the promisee about the probability that the promisor will perform.

EXTENDING THE ANALYSIS OF REPRESENTATIONS OF INTENTION

The above observations about the informational content of expressions of intention can be put somewhat more formally and integrated into our analysis as follows. Recall that A’s positive promise to x entails: REP1

A intends to x.

The fact that this can serve to inform the promisee as to the probability that the promisor will perform can be expressed as an entailment of REP1: REP1.1 The chances of A x ing are at least as great as the commonly known probability of her realizing that sort of intention in those circumstances.38 While REP1 says something about the promisor’s subjective state, REP1.1 says something about the objective probability of her performance (because of that subjective state). Just how likely it is that A will succeed in realizing an intention to x in those circumstances is an objective fact, one to which both promisor and promisee have access. It will turn on commonly knowable circumstances, like the difficulty of the act intended, the promisor’s past successes or failures in realizing such intentions, the likelihood of a change in circumstances that might cause the promisor to change her mind, and so forth. In familiar legal terms, the probability of a promisor’s realizing such an intention in those circumstances is the probability that a reasonable person with the common knowledge of speaker and hearer would infer. We can express REP1.1 in mathematical terms if we let Pi  the probability of A realizing an intention to x in the commonly known circumstances in which she promises to x. Given that Pp represents the probability that A will perform her promise, REP1.1 is equivalent to:

How to Say Things with Promises

REP1.1

Pp  Pi.

A positive promise says that Pp  Pi. Most of this is implicit in the categorical interpretation of a promise, which holds that every promise represents an intention to perform. More to the point, a positive promise’s representation of an intention to perform—REP1—is relevant to the promisee only because it entails something about the probability of performance—REP1.1. This entailment is crucial to the promisee’s decision whether or not to rely. So long as the probability of the promisor realizing that sort of intention is at least as great as the promisee’s participation constraint— so long as Pi  Pp*—a positive promise can assure a promisee that it is in her rational self-interest to rely on the promisor’s performing. Our discussion of blank and opaque promises, however, indicates that a promise can say less than this, for blank and opaque promises do not represent that the promisor intends to perform. That is, it is not the case that every promise says that Pp  Pi. A blank promise, as such, says nothing about the promisor’s intentions with respect to performance. It therefore doesn’t say anything about the probability of her performance relative to Pi. A promisee will choose to rely on a blank promise when he already has sufficient assurance that the promisor will perform. This will be the case where the promisee is indifferent as to whether she will perform (for example, because damages are fully compensatory—see scenarios 1 and 3) or when the promisee prefers nonperformance (for example, because damages are supercompensatory). A promisee might also choose to rely on a blank promise because he has other sources of information about the probability of the promisor’s performance—as in cases where the parties are repeat players, where the promisee knows that the promisor is particularly sensitive to the moral censure she will suffer if she does not perform, and so on. Unlike a blank promise, an opaque promise does say something about the promisor’s intentions with respect to performing. As defined above, A’s opaque promise to x entails: REP2 A does not intend not to x (which is not to say that she intends to x ). While an opaque promise says more than a blank promise about the promisor’s intentions, it does not provide nearly as much information about the probability of her performance as a positive promise does. A statement that the speaker does not have a certain intention (here an intention not to perform) does not say what sort of intention she does have. At most, an opaque promise says that

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the speaker is more likely to perform than if she intended not to do so. That is, REP2 entails: REP2.1

A is more likely to x than if she intended not to x.

We can represent this mathematically as follows. Assume that A has opaquely promised to x. Let Pj  the probability of A realizing an intention not to x in the commonly known circumstances in which she promises to x. That is, if A has an intention not to x, then the probability of her xing is Pp  (1  Pj). Since an opaque promise represents that the probability of performance is greater than if the promisor intended not to perform, REP2.1 is equivalent to: REP2.1

Pp  (1  Pj).

The situations in which a promisee will be willing to rely on an opaque promise are similar to those in which he will be willing to rely on a blank one—where his participation constraint Pp* is very low, and he is thus relatively indifferent as to the probability that the promisor will perform or prefers that she not perform, and where he has other sources of information about the probability of the promisor’s performance.

OTHER THINGS PROMISES SAY

So far we have been focusing on what promises can say about the promisor’s intentions. But once we see that the promisor’s intentions are material only because they say something about the probability of her performance, it is obvious that there are other ways a promisor might provide this information. We will consider two, which we call “definite-probability representations” and “warranting representations.” First, a promisor can simply say what the probability of her performance is. Some sellers expressly market their product on the basis of probability of performance. Federal Express advertises on its Web site that its “Custom Critical” service delivers more than 96 percent of its packages within fifteen minutes of the specified time.39 That is, it represents a 96 percent chance that if you ship your package using Custom Critical, Federal Express will perform, or that Pp  .96. Lojack, an auto-theft recovery device, reports the proportion of cars with Lojack that are recovered within twenty-four hours of being stolen.40 Slot ma-

How to Say Things with Promises

chines report the probability of winning; airlines advertize the probability of arriving on time; and a Long Island hospital markets the quality of its bypass surgery on the basis of the survival rate of its patients compared to that in other hospitals.41 We will call a promisor’s direct representation about the probability of her performance a definite-probability representation. Thus A’s definite-probability promise entails: REP3 The probability that A will perform is at least as great as she says it is. In other words, for some probability M, a definite-probability promise entails something of the form: REP3

Pp  M.42

A definite-probability promise can be positive, opaque, or blank. Thus a promisor can represent both that she intends to perform and expressly say what the probability of her performance is. Such a promise would entail both REP1.1 (that Pp  Pi) and REP3 (that Pp  M), both of which might be true. Conversely, a promisor could represent that the probability of her performing is M and at the same time disavow any representation of an intention to perform (a blank promise) or say that she represents no more than that she doesn’t intend not to perform (an opaque promise).43 The fact that sellers often market themselves on the basis of the probability of performance is empirical confirmation that promisees care about that fact. But for our purposes, it is more interesting to observe that a definite-probability representation functions in the same way that the representation of an intention to perform does—to assure the promisee that he can safely rely on the promisor’s performance. And we can imagine an alternative promissory practice in which, rather than implicitly saying that the promisor intended to perform, the very act of promising represented that the probability of performance was at least a certain value, say at least 75 percent. This would be a practice in which all promises were definite-probability promises. In such a practice, a person would be liable for promissory fraud for making a promise knowing that the probability of her performance was less than the default probability representation. This is obviously not our promissory practice, and for good reasons, having to do with the advantages of the flexibility and even vagueness of saying one intends to do something.44 Nonetheless, the possibility of such a promissory practice is revealing. And we will argue in chapter 5 that it would be useful to

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integrate some aspects of definite-probability representations into the default legal interpretation of an intention to perform. A second important way that a promisor can say something about the probability of her performing without saying that she intends to perform is with reference to the promisee’s participation constraint. A promisor might not say precisely what the probability of performance is but might still assure the promisee that it is so great that it is in his rational self-interest to rely. Federal Express’s old slogan, “When it absolutely, positively has to be there overnight,” suggested just this—that even when the stakes are high, Federal Express is so likely to deliver your package overnight that you can rely on its doing so. That is, the slogan said that Pp  Pp*.45 And some promises say this even where the promisor doesn’t say so in so many words. That is, in some contexts, the mere act of promising communicates that it is in the promisee’s rational self-interest to rely. Consider the statement “I promise to quit smoking,” uttered by Alice to her vehemently antismoking fiancé, Bob. The promise represents a higher probability that Alice will quit smoking than if she had merely said “I intend to quit smoking.” Taken in context, it says that Alice is so likely to quit smoking that Bob’s aversion to being married to a smoker should not keep him from marrying her. In such situations, the statement “I promise to x” should be interpreted to say that Pp  Pp*. Courts that adhere to the categorical interpretation risk overlooking material representations of the above sort. Exemplary on this count is a case that went all the way to the Alabama Supreme Court, Ex parte Lumpkin.46 The plaintiffs leased a building from the defendants to be used as a bar. In order to meet zoning requirements, the tenants needed to acquire the use of an adjacent property as a parking lot. In their suit, they claimed that the defendants were aware of this requirement and that during negotiations told them that the adjacent property would be included in the lease. When the plaintiffs then balked at signing a lease that did not include the adjacent property, the defendants told them “the owner was good for his word,” “we’ll be your witnesses,” and “don’t worry about it, because we’ll have the property by the end of the week.”47 The trial court granted summary judgment on the plaintiff ’s promissory-fraud claim for the defendants, finding that there had been no showing that they didn’t intend to lease the property. The Court of Civil Appeals reversed and remanded, emphasizing the defendant’s express assurances that the plaintiffs could rely on their acquiring the property.48 The Alabama Supreme Court then reversed the Court of Civil Appeals, finding that in fact there was evidence that

How to Say Things with Promises

one of the defendants “repeatedly tried” to get the adjacent property, which indicated that defendants intended to obtain it when they made their promise.49 The trial court’s and the Supreme Court’s decisions reflect a commitment to the traditional theory of promissory representations, which assumes that a promise represents an intention to perform and nothing else. The Court of Civil Appeals, on the other hand, recognized that the defendants had said more than that they simply intended to acquire the adjacent property. Their statements “the owner was good for his word,” “we’ll be your witnesses,” and “don’t worry about it, because we’ll have the property by the end of the week” represented that they were so likely to acquire the adjacent parcel that the plaintiffs could safely sign the lease—though that lease would be worthless without the property. We will call these sorts of promissory representations, which say that the promisor is so likely to perform that the promisee can rationally rely on it, warranting representations. A promise can be warranting either because the promisor makes an explicit warranting representation (“I’ve got your best interest at heart,” “You can count on it,” “When it absolutely, positively has to be there overnight”) or because the context is such that the very act of promising is itself a warranting representation (the fiancée’s promise to quit smoking). We can further distinguish two ways a promisor can warrant her performance. We call the first “fully warranting,” or simply “warranting,” and the second “semiwarranting.” A promise is fully warranting if the promisor represents that the probability of her performance is so great that the promisee can safely rely on it. That is, if A’s statement to B of the form “I promise to x” is a fully warranting promise, then it entails: REP4 A is so likely to x that it is in B’s rational self-interest to rely on her x ing. We can restate REP4 in terms of the above analysis of a promisee’s participation constraint as: REP4

Pp  Pp*.

That is, a fully warranting promisor represents that the objective probability of her performance is at least as great as the promisee’s participation constraint. Just as a promisor can make a definite-probability promise regardless of whether she represents that she intends to perform, a fully warranting promise might or might not also say that the promisor intends to perform. Where the

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promisee’s participation constraint is very low, Pp* might be considerably less than Pi. In this case the promisee does not necessarily require assurance that the promisor intends to perform, that Pp  Pi, but might nonetheless want assurance that Pp  Pp*. On the other hand, where the promisee’s participation constraint is quite high (for instance, because the anticipated damages in case of breach are slight), the mere assurance that the promisor intends to perform might not be sufficient assurance. In this case, the promisor might want also to warrant that Pp  Pp* in order to convince the promisee that it is in his rational self-interest to rely on her performing. A fully warranting promise effectively says that the promisor has an objectively reasonable belief that Pp  Pp*.50 There are two ways such a representation can be false. First, the promisor might believe that in fact Pp  Pp*, that it is not in the promisee’s best interest to rely. Alternatively, the promisor might have no belief as to whether or not Pp  Pp* because she doesn’t know enough about what the promisee stands to gain from the transaction, what his reliance costs will be, what his costs in the case of breach will be, and so forth, to evaluate the promisee’s participation constraint. The distinction here is similar to that between not intending to do something and intending not to do it. A promisor might not (given commonly known circumstances) have a wellfounded belief that Pp  Pp*, yet not believe that Pp  Pp*. This distinction suggests an intermediate category of promissory representations, which we call semiwarranting. If A’s statement to B of the form “I promise to x” is a semiwarranting promise, then it entails: REP5 A does not believe that the probability of her x ing is so low that it is not in B’s rational self-interest to rely on her x ing (which is not to say that she believes that it is in B’s rational self-interest to rely). We can restate REP5 in terms of the above analysis of a promisee’s participation constraint as: REP5

A does not believe that Pp  Pp*.

A promisor who makes a semiwarranting representation does not say that she believes it is in the promisee’s best interest to rely. She simply says that she does not have any information to cause her to think that he should not rely. If the distinction between fully warranting and semiwarranting promises is unintuitive, it might help to compare the latter to the implied warranty of fitness as described in the Uniform Commercial Code. Section 2-315 of the U.C.C. states: “Where the seller at the time of contracting has reason to know

How to Say Things with Promises

any particular purpose for which the goods are required and that the buyer is relying on the seller’s skill or judgment to select or furnish suitable goods, there is unless excluded or modified . . . an implied warranty that the goods shall be fit for such purpose.” The implied warranty of fitness means that if a seller has information that indicates the buyer should not rely on the goods she is providing, she must disclose that fact or opt out of the default warranty, or else face liability for breaching it. The rule is not, however, that the seller must believe that the goods are just what the buyer needs, for she might have no “reason to know” the particular purpose for which the buyer requires the goods. Similarly, a semiwarranting promise represents that the promisor does not have any information indicating that the promisee should not rely on her performing (that Pp  Pp*). This does not mean, however, that she believes it to be in the promisee’s best interest to rely (that Pp  Pp*). It might be that the promisor doesn’t have enough information about the promisee’s participation constraint (Pp*) to have any opinion on the matter. The idea of semiwarranting promises also resonates with the affirmative duties to disclose and with unilateral mistake described in the Second Restatement of Contracts. Under the Second Restatement, where a party suffers from having been materially mistaken as to a basic assumption on which he made the contract and where the other party knows of that mistake, the mistaken party can void the contract.51 A false semiwarranting representation can be read as a special case of unilateral mistake. A semiwarranting representation is false only if the promisor believes that the probability of her performing is so low that the promisee should not rely. This is also a case of unilateral mistake. The promisee was mistaken as to a material fact (whether it was in his interest to rely), and the promisor had information that he was mistaken but failed to share it with him. If one side knows that a basic assumption of the other side is in error, she has a duty to disclose.52 Like a fully warranting promise, a semiwarranting promise can be positive, opaque, or blank. There is no a priori relationship between a promisor’s belief as to whether it’s in the promisee’s interest to rely and her intention to perform. Where the promisee’s participation constraint is very low, he might not require assurance that the promisor intends to perform (because Pp*  Pi). But he might still want to know that the promisor doesn’t have any information that leads her to believe that Pp  Pp*. Where the promisee’s participation constraint is very high, a positive promissory representation might not be enough to convince the promisee to rely on her performing (that Pp*  Pi). Here, a promisor who is not fully informed of the promisee’s participation constraint

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can still provide some measure of additional assurance by communicating that at least she has no reason to believe that Pp  Pp*. SUMMARY

The discussion above provides a basic typology of what promises can say. We have described three categories of promissory representations regarding the probability of the promisor’s performance. First, there are representations relative to the promisor’s intentions. A positive promise says that the promisor intends to perform. A blank promise represents nothing about the promisor’s intentions with respect to performance. An opaque promise says only that she does not intend not to perform. Next are representations relative to some fixed probability. A definite-probability promise says that the probability of perfor-

Table 1 Type of representation

Truth conditions of the representation

Information about the probability of performance

Positive Opaque

Promisor intends to perform Promisor does not intend not to perform Regardless of promisor’s intention with respect to performance The probability of the promisor performing is at least M The probability of the promisor performing is so great that it is in the promisee’s rational selfinterest to rely on it Promisor does not believe that the probability of her performing is so low that it is not in the promisee’s rational self-interest to rely on it

Pp  Pi Pp  (1  Pj)

Blank Definite-probability Fully warranting

Semiwarranting

None Pp  M Pp  Pp*

Promisor does not believe that Pp  Pp*

where: Pp  probability of performance Pi  the probability of A realizing an intention to do the act promised in the commonly known circumstances Pj  the probability of A realizing an intention not to do the act promised in the commonly known circumstances M  some fixed probability Pp*  the promisee’s participation constraint

How to Say Things with Promises

mance is at least some value M. Last are those representations relative to the promisee’s participation constraint. A fully warranting promise says that the promisor is so likely to perform that it is in the promisee’s rational self-interest to rely on her doing so. A semiwarranting promise says only that the promisor does not believe that it is not in the promisee’s interest to rely. These three categories of promissory representations are not mutually exclusive. A promise can be both warranting and positive, definite-probability and opaque, and so forth. The typology is summarized in table 1. This table maps the logical space of the most relevant things that a promise can say about the probability of performance. This logical space is a space of possible representations. What any given promise says—whether it is positive, opaque, or blank, definite-probability or not, warranting, semiwarranting, or nonwarranting—will depend on just what statements the promisor makes, the circumstances in which she makes them, and the interpretive conventions of the relevant language community. How courts should go about deciding what a given promise represents, and whether they should recognize all of the above types of promissory representation, is the topic of chapter 5. But before we get there, we must address, first, how promises can be false and when promisors are responsible for their promissory misrepresentations (chapter 3) and, second, whether, when, and how the law should concern itself with what promises say (chapter 4).

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Chapter 3 Falsehood and

Responsibility

Having described what promises can say, we are well on our way to a theory of insincere promising. Once we see that promises can also be used to represent that something is the case, it is obvious that promisors can use them to mis represent how things are. But there are further complications in thinking about when a promisor should be held legally responsible for her promissory falsehood. While misrepresentations are, as a general matter, wrong, not every act of misrepresentation is subject to the same degree of censure. A knowing lie is worse than an honest mistake. And within the category of mistake too there are degrees of culpability, depending on whether the speaker’s error is a reasonable one, is the result of negligence, or is symptomatic of a reckless disregard of the truth. All of these are familiar observations, if not from the first semester of Torts, then from our everyday moral judgments. They allow us to distinguish two additional aspects of establishing promissory insincerity. In the previous chapter we began to unpack the representation inquiry, which asks what, if anything, a promise says. It must also be decided whether what was said was true or false, which we call the 46

Falsehood and Responsibility

veracity inquiry. And there is the question of whether the promisor acted culpably in making such a misrepresentation, which we call the scienter inquiry. Although these categories and distinctions are easy enough to grasp, and familiar in the law of deceit, courts faced with allegations of insincere promising often confuse them.1 In the preceding chapter we showed how they tend to oversimplify the representation inquiry by adhering to the categorical interpretation, which is the assumption that every promise represents an intention to perform and nothing else. In this chapter, we discuss a pervasive conflation of the veracity and scienter questions. Courts commonly fail to recognize that falsehood and culpability are distinct conditions of legal liability for promissory fraud. The traditional legal actions for insincere promising differ from most other forms of deceit because the alleged misrepresentation concerns the speaker’s own intentions.2 The allegation is not that the speaker lied about the world “out there” but that she misrepresented something about her own mind “in here.” This gives rise to the illusion that all promissory misrepresentations, since they concern the “in here,” are knowing misrepresentations—that is, that to make such a misrepresentation is necessarily to know that it is false. The mistake can be expressed in the following argument. (1) If there is one thing a person knows, it is her own mind; (2) it follows that a person who misrepresents her intentions must know that her representation is false; (3) it follows that if the veracity inquiry is satisfied in a claim of insincere promising, the misrepresentation was a knowing one; (4) thus, if the veracity inquiry is satisfied, so is the scienter inquiry. Most courts, because of this reasoning, do not engage in a separate scienter inquiry when considering allegations of insincere promising. But the above argument is mistaken. First, it is not the case that the only way to lie with a promise is to misrepresent one’s intentions, the implicit assumption of (3). Second, it is not the case that every misrepresentation of intention is a knowing misrepresentation, as (2) assumes. This chapter describes the common confusion of the veracity and scienter questions and discusses why they should be kept separate. Before we jump in, a terminological point. One reason for holding a speaker liable for a misrepresentation is that she knew she was saying something false. In listing the elements of deceit, courts often express a scienter element of this sort by saying that the misrepresentation was “intentional” or that the speaker

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had an “intent to deceive.” We are going to avoid this idiom and instead label such falsehoods “knowing” misrepresentations. While knowing that one is engaging in deception is distinct from intending to deceive, there is a close analytical link between the two. And for the purpose of assigning legal liability, it is always enough to show knowledge.3 Most important, however, our terminology has the advantage of avoiding confusion between the object of many promissory misrepresentations (the promisor’s intention) and the attitude with which they are made (knowingly).

LEGAL CONFUSION ABOUT CULPABILITY

Every jurisdiction that assigns legal liability to insincere promises recognizes something like the veracity question. On the categorical interpretation, it is whether or not the promisor had an initial intent to perform. There is considerably less unanimity when it comes to scienter. Many courts that recognize promissory fraud simply state that liability exists when a promisor does not have a present intent to perform or intends not to perform and ignore scienter altogether.4 Others reference the elements of deceit in general, including that the misrepresentation be made knowingly or recklessly, but then fail to apply that scienter requirement to the alleged promissory misrepresentation.5 A minority distinguish between a veracity element and a scienter element specific to the civil action for promissory fraud or the crime of false promise. Most Alabama courts, for instance, say that a claimant-promisee must prove both that the promisor did not intend to perform and that she had an intent to deceive, which comes close to the idea that the misrepresentation was made knowingly.6 But these courts often make the distinction using language suggesting that an intent to deceive follows from no intent to perform—for instance, “The plaintiff must show . . . that when the defendant made the promise he intended not to do the act or acts promised, but intended to deceive the plaintiff.”7 More important than what courts say is how they actually decide cases. Needless to say, those courts that do not mention scienter at all completely ignore this traditional element of deceit. But even among courts that pay lip service to a separate scienter requirement, most fail to discuss whether or not it is satisfied.8 And neglecting the question of culpability makes a difference. Consider the facts in Leisure American Resorts, Inc. v. Knutilla.9 Knutilla purchased a timeshare from Alpine Bay Resorts. After making the down payment and some, but not all, of the monthly payments, he called Alpine Bay and asked if it would

Falsehood and Responsibility

buy his time-share back. Although the corporation’s policy was to repurchase only in hardship cases, the agent who took the call told Knutilla that Alpine Bay would repurchase. Alpine Bay later informed Knutilla that in fact it would not repurchase, and Knutilla brought suit. On appeal from the jury’s finding of promissory fraud, the Alabama Supreme Court found that Alpine Bay was aware of the policy of repurchasing time-shares only in hardship cases and thus could not have intended to perform at the time its agent made the promise. That is, it found sufficient evidence to satisfy the veracity inquiry. The court repeated that Alabama law required intent to deceive to make out a case of promissory fraud.10 But the opinion doesn’t discuss any evidence of such an intent. And it is clear from the facts that neither the agent who made the promise nor Alpine Bay had any reason to deceive Knutilla as to the repurchase policy: the sale had already been made, and Alpine Bay had nothing to gain by misleading him. At most this was a case of mistake—perhaps negligent or reckless, but not involving an intent to deceive. Had the court paid attention to the scienter requirement, it might not have affirmed the jury finding of promissory fraud. The one jurisdiction where scienter seems consistently to make a difference is Illinois, which requires proof not only of no intent but also that “the false promise or representation of intention or of future conduct is the scheme or device to accomplish the fraud and thereby cheat and defraud another.”11 This invokes something like a scienter requirement, since “scheme or device” suggests fraudulent intent. A number of courts applying the Illinois test have rejected claims of promissory fraud for insufficient evidence of a scheme to defraud,12 and the Illinois rule is occasionally even read as placing it among the minority of jurisdictions that do not recognize the action for promissory fraud.13 But in fact claimants have succeeded in proving promissory fraud under Illinois law,14 though the application of the scheme or device requirement has been rather arbitrary, with different courts giving the words different meanings.15 Except for the Illinois decisions, our research failed to uncover a single case in which a court found that the defendant-promisor misrepresented her intention to perform, but imposed no liability because there was no proof of scienter. That is, our research didn’t uncover a single case in which a scienter requirement made a difference in the outcome.16 Regardless of whether courts mention scienter when they list elements, when it comes to actually deciding cases, proof of culpability for the promisor’s misrepresentation does not play an important role. This is a mistake.

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THE DISTINCTION BETWEEN THE VERACITY AND SCIENTER QUESTIONS

So why do courts fail to ask about whether defendants acted culpably when they find a promissory misrepresentation? As we mentioned above, it is natural to think that one can misrepresent one’s intentions only knowingly. Consider the following, nonpromissory misrepresentation of a nonsubjective fact. The seller of a crate of apples labeled “Fujis” doesn’t know that in fact it contains only Macintoshes. If she tells a buyer that the crate contains Fuji apples, her statement is a misrepresentation. But her misrepresentation is not a knowing one—she is mistaken as to the contents of the box. It is difficult to imagine a promisor making this sort of mistake about her intention to perform. Intentions are not like apples in a crate: it is virtually axiomatic that to have an intention is to know that one has it. A promisor thus knows whether or not she intends to perform. If she misrepresents that intention, it must be that she does so knowingly. The idea that every misrepresentation of intention is a knowing misrepresentation seems to underlie courts’ reluctance to insist on separate proof of scienter in promissory-fraud cases. As one Maryland court put it, “[A]ny promise that is made with the present intention not to perform or any prediction that is made with present knowledge that the predicted event will not occur is, perforce, an intentional misrepresentation.”17 The assumption explains why so many courts don’t even mention scienter when considering promissory-fraud cases and why others slide so easily from the defendant’s lack of an intent to perform to her intent to deceive. There is something right here. We shall argue in chapter 6 that there is a close evidentiary relationship between proof that a promisor did not intend to perform and proof that she intended to deceive the promisee. But it is wrong to think that the scienter question collapses into the veracity one. While promisors know “perforce” their own intent, they do not necessarily know either the objective probability of their performance or the scope of their promissory representations. If a promisor doesn’t know the objective probability of her performance, she can be mistaken as to the facts she purports to represent. If she doesn’t know the scope of her promissory representation, she can be mistaken as to the meaning of her own words. Both types of mistake can give rise to nonknowing promissory misrepresentations. We consider each in more detail.

Falsehood and Responsibility

Mistakes of Fact

First, a promisor can be mistaken about what the probability of her performance actually is. We’ve argued that what a promisee really cares about is not whether the promisor intends to perform (unless he is interested in something like her moral rectitude) but the chances that she will perform. Representations about the promisor’s intentions are material because they provide information about the probability of performance. But a promisor can misrepresent the probability of her performance without misrepresenting her intention to perform. This can be the case whether her promise is fully warranting, definiteprobability, positive, or opaque. We consider these different representational types in turn.18 Fully warranting and definite-probability promissory representations don’t say anything about the promisor’s intentions. Consequently, the intuition that a misrepresentation of intent must be a knowing misrepresentation indicates nothing about a speaker’s culpability for misrepresentations of these sorts. These representations do, however, say something about the objective probability of performance. And this is something about which a promisor might well be mistaken—as when a promisor doesn’t know of conditions at the time of promising that are likely to make performance impossible. Moreover, if the promise was warranting, the promisor might also be mistaken about the promisee’s participation constraint—for example, if she underestimates the costs to him should she fail to perform. Neither a warranting nor a definiteprobability representation is perforce knowing. Scienter, therefore, requires separate proof. But warranting and definite-probability representations are the easy cases. We want to argue that even positive and opaque promissory misrepresentations can be the result of mistake as to the underlying facts. This is because even where such a representation does not misstate the promisor’s intentions, it can misstate the objective probability of her performance. Recall that we have distinguished two entailments of a positive promise to x: (1) that the promisor intends to x—REP1—and consequently (2) that the probability of her x ing is at least as great as the objectively reasonable chances of her realizing that sort of intention in the commonly known circumstances— REP1.1. (Opaque promises have similarly distinguishable entailments—REP2 and REP 2.1.) Even where it is true that the positive promisor intends to perform, it might be that the probability of her realizing that intention is considerably less than the promisee reasonably expects based on her positive representation—that is, considerably less than REP1.1 says it is.

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Falsehood and Responsibility

Suppose, for instance, a purchaser has been reckless in keeping her books and is in fact insolvent when she buys an item on credit. Her positive promise might truthfully inform the promisee of her intention (REP1). But it incorrectly suggests that she is as likely to perform as one would reasonably expect given her intention to perform in the mutually known circumstances (REP1.1). Courts often miss this objective prong of the veracity inquiry.19 For instance, in German National Bank v. Princeton State Bank, the defendant paid the claimant with a note for $2,500, despite the fact that, unbeknownst to the claimant, he was insolvent.20 The Wisconsin Supreme Court, assuming the question was just the subjective state of the defendant, found the defendant’s insolvency insufficient as evidence of promissory fraud. “An honest, though abortive, purpose to continue business and pay for the goods is consistent with the vendee’s own knowledge of his own insolvency; and the purchase is not fraudulent when made with such intent, though founded in delusion and unreasonable expectations.”21 This decision was wrong.22 While the evidence of the defendant’s insolvency might have been insufficient as to the subjective fact of whether he intended to perform, it was certainly enough to show that the reasonable interpretation of his positive promise was false. Despite the fact that he intended to perform, he misrepresented the objective probability of his performance.23 Misrepresentations of this sort need not be knowing. The defendant-promisor in German National Bank may well have been mistaken as to the conditions affecting his ability to perform. It is true that even mistaken representations may be culpable. If the promisor recklessly disregarded the signs of his impending insolvency, then he should be held responsible for his misrepresentation. But this must be proven. Satisfying the veracity inquiry does not answer the scienter question. Mistakes of Meaning

The second error in the assumption that every promissory misrepresentation is a knowing one appears even if we grant the restriction of insincere promises to misrepresentations of intention (as opposed to the objective probability of performance). It is simply not the case that every misrepresentation of intention is a knowing misrepresentation. This is most obvious when the defendant-promisor is a corporate entity or represented by an agent, as in Knutilla, the case involving the time-share repurchase. In that case, the defendant-promisor’s agent made a positive promissory

Falsehood and Responsibility

representation on behalf of the defendant that the defendant would repurchase the claimant’s time-share, despite the corporation’s policy of repurchasing only in hardship cases. The sale of the time-share had already taken place, a down payment and some of the monthly payments had been made, and neither the corporation nor its agent had anything to gain by deceiving the claimant as to the repurchase policy. In all likelihood, the agent was simply mistaken about the policy. Now it can make sense to characterize this as a misrepresentation of the corporation’s intention, in the legal sense that corporate entities have intentions. And it might be that the defendant’s agent acted negligently or even recklessly in telling the claimant that his time-share would be repurchased, or that the corporation was negligent or reckless in allowing the agent to do so. But it only creates confusion to say that the misrepresentation was a knowing one. All the evidence points to this being a case of mistake. While an individual promisor necessarily knows her own intent with respect to performing, an agent does not necessarily know the principal’s intent, and the principal might not know what its agent is saying. But a promisor need not be a corporate entity or speak through an agent to mistakenly misrepresent her intention to perform. A natural person can also nonknowingly misrepresent her own intentions. This is because a speaker can have false beliefs not only about the facts she purports to describe but also as to the meaning of what she says. This is particularly true when the promisor is not the drafter of her own promise. Consumers often sign form contracts without reading them and are thus unaware of the specifics of what their promise says. Take, for example, the round-trip airline ticket that Justice Antonin Scalia purchased to return from New Orleans after he had flown for free to a duck-hunting trip on Air Force Two with Supreme Court litigant Vice President Dick Cheney. Justice Scalia purchased round-trip airline tickets for himself and family members instead of one-way tickets because, as he explained, “they were the least expensive.”24 He, like many others, had no intention of using the return portion of the ticket. This seems like promissory fraud, because the terms and conditions of Scalia’s ticket expressly prohibited throw-away ticketing.25 But Scalia might have been unaware that he was representing a present intention of flying round-trip. It is one thing to impose a duty to read where the sanction is run-of-the-mill compensatory damages, but it would be very different to hold the good Justice liable for punitive damages (or the crime of false promise) when he may have made an unknowing and nonreckless misrepresentation.26 This doesn’t mean

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that nondrafting promisors should be immune from promissory-fraud liability. But courts should take the scienter requirement seriously before holding nondrafting promisors liable for promissory fraud. This distinction between mistakes as to underlying facts and mistakes as to meaning is not unique to promissory representations. Recall our nonpromissory example of the apple vendor who tells a purchaser she is selling him Fuji apples, when in fact the apples in question are Macintoshes. Such a nonpromissory misrepresentation would be a matter of mistake if the seller had a false belief about what sort of apples were in the crate—a mistake as to the underlying facts. But she might instead be mistaken as to the meaning of the word Fuji. Maybe she knows that the crate contains Macintoshes, but is uninitiated in the ways of apples and thinks that Fuji is just another word for Macintosh. Again her misrepresentation, “I have a crate of Fuji apples to sell you,” is a matter of mistake. But she is mistaken not as to the underlying facts but about the meaning of her own words, about what she is saying. A properly formulated scienter requirement in actions for deceit should make explicit the difference between these types of misrepresentations.27 A speaker who makes a representation R, which falsely represents that T is the case, makes that misrepresentation knowingly only if (1) she knows that T is not the case (is aware of the underlying facts) and (2) she knows that R represented that T was the case (knows the meaning of her words). A speaker who makes a representation R, which falsely represents that T is the case, does so recklessly only if (1) she makes R with reckless disregard as to whether T is the case or (2) she makes R with reckless disregard as to the meaning of R. The speaker’s mistake is a reasonable one only if, given her epistemic position, (1) her false belief that T is the case is reasonable and (2) her interpretation of R is also reasonable. Returning to the case of promissory representations, the point of distinguishing between these two causes of misrepresentation is that the claim that any misrepresentation of intention must be a knowing misrepresentation also ignores mistakes of the second sort—errors about the meaning of the speech act in question. A promisor can mistakenly misrepresent her intentions with respect to performance if she is unaware of what her promise says about those intentions. In the context of promissory misrepresentations, we can further distinguish two subspecies. First and more commonly, a promisor can misunderstand the terms of her promise. Recall our example of Melita, who promises Joe to install a pool in Joe’s back yard in Connecticut. So far as Melita is concerned, the words to install a pool mean digging the hole and pouring the concrete but do

Falsehood and Responsibility

not include putting in a filtration system. Joe, on the other hand, understands “to install a pool” to include installing the filtration system, which turns out to be the default interpretation Connecticut courts have adopted. In an action for promissory fraud, Melita might feel compelled to admit that she did not intend to install a filtration system. Under Connecticut’s interpretation of her promise, it follows that she did not intend to perform, though her promise represented that she had such an intention. But her misrepresentation was not a knowing one. She misunderstood the terms of her promise. In fact we find a well-defined category of cases in which judicial inattention to mistakes in meaning has the result that innocent promissory misrepresentations are treated the same as culpable ones. These are cases where a court takes a defendant’s testimony that she had a different understanding of her promise as evidence that she did not intend to perform and thus committed promissory fraud. For instance, in H Enterprises International v. General Electric Capital, the district court considered a loan by GE Capital to Waldorf Corporation that contained a provision for a future interest payment conditioned on a triggering disposition of Waldorf.28 Waldorf paid off the loan early, after which a separate event triggered the conditional future interest payment, causing GE to demand the additional payment. Waldorf brought an action for, inter alia, promissory fraud. The loan documents were unclear as to whether the contingent future interest payment survived prepayment, and GE testified that it never intended prepayment to release the borrower from the potential future interest payment.29 The court considered this testimony sufficient evidence to send to the jury Waldorf’s promissory-fraud claim that GE never intended performance.30 But at best this is evidence that GE had a different interpretation of the terms of the agreement. Without further evidence that it was reckless in adopting that interpretation or that it knowingly deceived the claimant, the court should not have found sufficient evidence of promissory fraud to survive summary judgment. By ignoring the scienter requirement, it allowed the claimant to sue for promissory fraud based on the defendant’s attempt to explain what all the evidence suggests was an innocent mistake. Evidence that should have been exculpatory was instead used to inculpate the promisor.31 Our thesis that not all promises say the same thing opens up a second sort of possible mistake: A promisor can also be mistaken about what sort of promissory representation she has made. A court might find, for instance, that the promisor made a positive promissory representation, though she meant her promise to be opaque. Suppose a promisor believed that her ambiguous statement “You know, some people make promises they do not intend to perform”

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Opaque

Positive

Objective component

Promisor does not intend not to perform Pp  (1  Pj)

Did promisor intend not to perform? Was Pp (1  Pj)?

Was Pp  Pi?

P p  Pi

Objective component

Subjective component

Did promisor intend to perform?

Veracity question

Promisor intends to perform

Content

Subjective component

Type of promissory representation

Table 2

Did promisor recklessly disregard the meaning of her promise? Did promisor (1) recklessly disregard the facts or (2) recklessly disregard the meaning of her promise?

Did promisor recklessly disregard the meaning of her promise? Did promisor (1) recklessly disregard the facts or (2) recklessly disregard the meaning of her promise?

Reckless misrepresentation

Did promisor know the meaning of her promise? Did promisor (1) know the meaning of her promise and (2) know that the facts were otherwise?

Did promisor (1) know the meaning of her promise and (2) know that the facts were otherwise?

Did promisor know the meaning of her promise?

Knowing misrepresentation

Scienter question

57

Did promisor believe that Pp  Pp*? Was Pp  M?

Promisor does not believe that Pp  Pp* Pp  M

Semiwarranting

Express probability

Was Pp  Pp*?

Pp  Pp*

Fully warranting

Did promisor (1) recklessly disregard the facts or (2) recklessly disregard the meaning of her promise?

Did promisor recklessly disregard the meaning of her promise?

Did promisor (1) recklessly disregard the facts or (2) recklessly disregard the meaning of her promise?

Did promisor (1) know the meaning of her promise and (2) know that the facts were otherwise?

Did promisor know the meaning of her promise?

Did promisor (1) know the meaning of her promise and (2) know that the facts were otherwise?

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sufficed to make clear that her promise was not positive but opaque. We will argue in chapter 5 that this is insufficient to opt out of the positive default and that a court should conclude that the objective meaning of the promise was that the promisor intended to perform. If at the time of promising the promisor intended, say, to perform or to pay damages, then the veracity inquiry should reveal that her positive promissory representation was false. However, the scienter inquiry should show that this misrepresentation was not made knowingly, since she mistakenly believed her promise to be opaque. Again we must conclude that courts are wrong to assume that every misrepresentation of intention is a knowing misrepresentation. That assumption threatens innocently or merely negligently mistaken promisors with full-blown liability for promissory fraud. The antidote is to insist on evidence both of a promissory misrepresentation and that the promisor acted culpably in making that misrepresentation, that is, to ask both the veracity and the scienter questions.

HOW PROMISES CAN BE FALSE AND HOW PROMISORS CAN ACT CULPABLY

Our discussion of the difference between the veracity and scienter questions has also shown that what it takes to answer each—to establish falsehood and to prove culpability—varies greatly from case to case, depending both on the promissory representation in question and on whether one alleges knowledge or recklessness. The different requirements are summarized in table 2.

Chapter 4 Why Promissory Fraud?

Our analysis up to this point has been largely descriptive. We have asked what promises can say, how they can be false, and when promisors are responsible for such falsehoods. We now turn to the normative and ask what, if anything, the law should do about promissory misrepresentations. Should we hold people legally liable for their insincere promises? There was once considerable judicial skepticism toward imposing such liability. While the vast majority of U.S. jurisdictions today recognize the civil action for promissory fraud, this was not always the case.1 Some courts rejected the action based on bad metaphysics, like the idea that an intention is not a present fact and thus not actionable.2 But there are also a number of arguments we should take seriously today.3 It was commonly objected that the separate action for promissory fraud would threaten to convert every breach of contract into a tort.4 Along the same lines, courts emphasized the difficulty in proving an intent not to perform, suggesting that either the action will be impossible to prove or the standards of proof will be so relaxed as to threaten innocent promisors with liability.5 Still another proffered 59

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reason was that it simply isn’t reasonable for a promisee to rely on a representation of intent.6 More broadly, commentators have suggested that, as a general matter, courts shouldn’t look outside the dictionary meaning of a promise, and that if the parties want to make an enforceable representation of intent, they should do so expressly.7 And the action for promissory fraud has been viewed as a threat to the parol evidence rule, since it provides a means of enforcing an oral promise that contradicts a written instrument.8 As we said, we take these practical objections to legal liability seriously. Our answer to many of them lies in the details of chapters 5, 6, and 7. A number of the objections to promissory fraud are summed up in Judge Richard Posner’s observation, “Once a case gets to the jury, all bets are off.”9 But in many cases, it is possible to prove with sufficient certainty a promisor’s initial intent and the objective probability that she was going to perform. (The fact that Max Bialystock sold more than 1,000 percent interest in Springtime for Hitler clearly shows that he didn’t intend to keep his promise to return each investor’s share should the show turn a profit.) Chapters 5 and 6 discuss the sorts of evidence courts should demand where there is an allegation of insincere promising. So long as courts require claimants to introduce legally sufficient evidence of each element of the action—including evidence of what was said, that what was said was false, and that the promisor acted with the requisite scienter—innocent promisors will be shielded from liability, and we need not worry that the action will turn every breach of contract into a tort. In chapter 7 we argue that while the law of promissory misrepresentation can increase liability beyond the four corners of a written contract, it does so only where efficiency and fairness demand—where the promisee was reasonably mistaken as to a basic assumption or where the promisor acted wrongly. Again, this does not generally threaten limitations on contractual liability like the Statute of Frauds or the parol evidence rule. Finally, as we have shown in chapter 2, credible information about the promisor’s intent to perform and the probability that she will do so is often essential to a promisee’s decision to rely. This chapter will argue that it is also crucial to price and selection decisions and to the promisee’s ability to invest optimally in reliance. Where promissory representations are credible—as where they are backed up by legal guarantees—it is eminently reasonable to rely on them. This last point gets us to the central topic of this chapter, which is the argument for imposing heightened legal liability for insincere promising. We contend that legal liability is desirable because credible promissory representations can in a variety of ways promote efficient contracting. The most common rea-

Why Promissory Fraud?

son why this is so is that anticipated damages in case of breach are subcompensatory. Where a promisee isn’t certain to recover his reliance costs if the promisor fails to perform, a credible promissory representation can convince him that it is nonetheless in his interest to enter into the agreement. Credible promissory representations also allow promisees to choose the most efficient contracting partner and to decide how much to invest in precautions against nonperformance and performance-dependent profit-generating expenditures, decisions that are often difficult or impossible to incentivize optimally with breach-of-contract remedies alone. By imposing legal liability on insincere promisors, the law lends credibility to promissory representations in general and achieves these benefits. We also recognize, however, that such legal mechanisms are not always necessary to realize this value. We therefore suggest that courts should make it easy for the parties to contract out of liability for insincere promising. Having concluded that there is a role for a law of promissory misrepresentations, we then turn to the problem of how it should be structured. In the second section of this chapter, we argue that the law should attempt to deter knowing and reckless promissory misrepresentations with property-rule penalties, such as punitive damages, while reasonable or negligent misrepresentations should still suffice to give the promisee relief in the form of compensation for harms caused. In the third and final section, we make some concrete proposals about the form damages should take. The argument of this chapter is an economic one: Legal liability for promissory misrepresentations is desirable because it creates value by promoting efficient contracting. This is not to say that there aren’t other reasons for imposing liability. Thus fraudulent (that is, knowing or reckless) promissory misrepresentation is an excellent candidate for what Jean Hampton has called “expressive retribution.”10 And nonfraudulent promissory misrepresentations, while not necessarily culpable or wrongful in the sense of deserving punishment, infringe on the rights of the promisee in a way that implicates the principles of corrective justice described by Jules Coleman.11 But the application of these and other deontological theories to the special case of insincere promising seems to us more straightforward than the argument from efficiency. Thus, while we don’t doubt that there are interesting things to be said about how these theories might also support legal liability for promissory misrepresentations, we limit ourselves to the economic argument. Finally, we limit our focus in this and the next three chapters to civil liability for insincere promising, which is to say, to the civil actions for promissory fraud

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and promissory misrepresentation. We discuss the imposition of criminal liability in chapter 8.

WHY LEGAL LIABILITY FOR INSINCERE PROMISES?

Promissory representations create value when they are used to convince promisees to enter into mutually beneficial transactions. They also create value, we will argue, by enabling optimal price and selection decisions and by giving promisees information they need in order to determine how much to invest in reliance. The law can help secure these benefits by backing up what promisors say about the probability of performance with a legal guarantee, thereby lending promisors credibility they might not otherwise have. In this section we ask whether those same benefits can’t be secured at a lower cost with other legal mechanisms, particularly breach-of-contract remedies. We conclude that, while in a frictionless world breach-of-contract remedies might be structured to give the right informational incentives, in the real world of competing goals and subcompensatory damages legal liability for insincere promising has an important role to play. Three Functions of Promissory Representations

Our analysis so far has emphasized the way that promisors use what their promises say to convince promisees it is in their interest to rely. This is, however, only one function credible promissory representations serve. Here we reprise what we’ve said about the first function and describe two other uses of promissory representations: to facilitate efficient price and selection decisions and to provide promisees information they need to invest optimally in the transaction. The general point of making a promissory representation is to solve what we call the “reliability problem.” As a general matter, promisors promise in order to convince promisees that they can rely on the promisors doing the thing promised. This is most obvious in promises for consideration (as when Wimpy promises to pay on Tuesday for a hamburger today), but it is also the case in socalled gratuitous promises (as when Alice promises Bob to do the dishes in order to convince Bob that he need not do them himself ).12 A rationally selfinterested promisee will choose to rely only if he believes that that the benefits from accepting the promise exceed the costs of relying on it. Because in many

Why Promissory Fraud?

cases the promisee’s anticipated benefit from the promisor’s performance must be discounted by the chance that she won’t perform, that benefit often depends on the probability of performance.13 The minimum probability of performance for which a promisee still finds it in his interest to rely is the promisee’s participation constraint. The reliability problem is this: a promisor must convince the promisee that she is so likely to perform that it is in the promisee’s rational self-interest to rely, that the probability of her performance satisfies his participation constraint. In some cases, the very act of promising is enough to solve the reliability problem. By making a promise, the promisor undertakes an obligation and subjects herself to sanctions (moral, legal, and otherwise) and other possible negative consequences (for example, reputational) should she fail to perform. This performative force is the defining characteristic of a promise. Where there is a relationship of moral trust between promisor and promisee (trust that the promisor will do the right thing), the promissory obligation itself can suffice to convince the promisee that the probability of performance meets his participation constraint.14 Where there is not a relationship of trust, the fact that the promisor will be subject to various sanctions and other negative consequences should she fail to perform can still be enough to convince him. This is so when the promisee believes that it will be in the promisor’s interest to perform—that it will cost her less to perform than to pay damages, that the reputational costs of breach will outweigh the costs of performance, and so forth.15 But in many instances—especially where there is a lack of trust and where the promisee doesn’t know much about the promisor and her incentive to perform—the promissory obligation alone is not enough to convince the promisee that the chances of performance are so great that it is in his interest to rely. Where this is the case, credible promissory representations can solve the reliability problem. By sharing what she knows about the probability of her performance, the promisor gives the promisee the information he needs to judge whether his participation constraint is met, to decide whether it is in his interest to rely. This sharing of information is a good thing because it makes possible mutually beneficial agreements that would otherwise be prevented by the parties’ lack of trust or knowledge. Credible information about the probability of performance can also facilitate efficient price and selection decisions. The value of a promise to a promisee depends in many cases on the chances that it will be performed. If Henry has to choose between contracting with June and contracting with Anais to repave his driveway, he will probably care very much about the chances that each will per-

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form. Thus he will want to know that Anais intends to perform, while June does not. Or he will want to know that there’s a 50 percent chance that June will be unable to perform, while Anais has never broken a promise to repave. And if Anais can credibly communicate that information, she can set her price accordingly—raising her price to reflect the added benefit that her probable performance provides. In this way, credible promissory representations function to make price and selection decisions more efficient.16 Finally, a promisee can use information about the probability of performance to decide how much to invest in the transaction—how much he should spend on measures that will increase his profit in the case of performance and what precautions he should take to protect his interests in the case of nonperformance. The problem of creating the right incentives for optimal investment is a familiar one. It is commonly recognized that perfect expectation damages lead to inefficient promisee reliance.17 The problem is that perfect compensation does not require a promisee to internalize the costs of his behavior, since the promisor will pay those costs if she doesn’t perform. Knowing that he will be fully covered in the case of nonperformance, the promisee has an incentive to underinvest in precautions against nonperformance (since he will be compensated for his losses in the case of breach) and to overinvest in measures that will increase his benefits in the case of performance (since those expenditures will be recouped in the case of breach). The incentive problem is solved by decoupling damages from actual reliance, so that every additional dollar in reliance does not net the nonbreaching party an additional dollar in damages in the case of breach.18 Once the law has incentivized optimal investment, however, there is still the problem of getting the promisee the information he needs to be able to do so. Among the most significant pieces of information he needs is the likelihood that the promisor will perform.19 This can be shown with a simple example. Consider a sales contract between Martha, a wholesaler, and George, a retailer, where George stands to net $1,000 from reselling the goods in question. Now suppose that George can hedge his losses in case Martha fails to deliver by purchasing for $150 an option to buy comparable goods from Martha’s competitor. Whether George should hedge depends, among other things, on how likely it is that Martha will perform. If George acts optimally, he will purchase the option only if the chance of an uncompensated breach is greater than 15 percent ($1,000 potential gain .15 chance of realization  $150 purchase price).20 George will know if it is a good deal to buy the option only if he knows the chances that Martha will perform. The same logic holds for expenditures to

Why Promissory Fraud?

increase George’s profit if Martha performs. Suppose George is considering whether to advertise in the local paper. An advertisement costs $75 and promises to increase George’s net profit by $100, but only if Martha delivers the goods. George should purchase the advertisement only if there is at least a 75 percent chance of delivery ($100 potential gain .75 chance of realization  $75 purchase price). In sum, George’s ability to invest optimally depends on what he knows about the probability of performance. Martha’s credible promissory representation provides George the information he needs to determine how much he should invest in reliance.21 These, then, are three separate ways that credible promissory representations can create value: they can solve the reliability problem, they can facilitate efficient price and selection decisions, and they can provide promisees the information they need to invest optimally.22 The basic argument for imposing legal liability on insincere promisors is that it lends promissory representations the credibility needed to secure these benefits. Legal liability for insincere promising gives promisors an incentive not to misrepresent the probability of performance where it might otherwise be in their interest to do so.23 Because promisees are aware of that incentive, they know that they can trust promissory representations and secure the benefits of the information they contain. Remedies for Breach of Contract?

We have shown how legal liability for insincere promising can work to secure the benefits of credible promissory representations. But this is not yet to show that it is the only or best device for accomplishing this end. It may be that breach-of-contract remedies can be structured to achieve the same results at a lower cost. In this section we construct as strong an argument as we can that breach-of-contract remedies can do the job. In the next we examine its weaknesses and make the case for imposing liability for promissory misrepresentations. As Richard Craswell enjoys pointing out, remedies for breach of contract perform multiple functions.24 Among other things, available remedies determine what investments the parties will make in the transaction, when the promisor has an incentive to breach, and the parties’ bargaining positions in case there is a threat of nonperformance. We now want to ask what impact breach-of-contract remedies have on those decisions that promissory representations enable—the promisee’s initial decision to rely (typically by entering into a contract), the promisor’s pricing and the promisee’s selection decisions, and the promisee’s decision about how much to invest in the transaction. If

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there is a breach-of-contract remedy that optimizes these choices, then the law of promissory fraud may be unnecessary and, since it threatens to chill otherwise valuable contracting behavior and taxes the courts, undesirable.25 We begin with the reliability problem and the promisee’s binary decision whether or not to enter into the transaction. Breach-of-contract damages serve not only to deter breach but also, and perhaps just as important, to make the promisee relatively indifferent as to the probability of performance. Full expectation damages make the promisee neutral as to whether or not the promisor performs, since he gets the benefit of the bargain no matter what.26 Specific performance has a similar effect, since it guarantees the promisee performance or his price for breach.27 Under either regime, therefore, there is no reliability problem. And in fact the reliability problem can be solved with even less. Our analysis of promisee participation constraints in chapter 2 shows that, so far as the initial decision to rely goes, it is enough if the promisee expects full reliance damages, which are generally less than expectation damages or the benefits of the specific performance remedy. With guaranteed reliance damages, if the promisor performs, the promisee gets the benefit he bargained for, which is presumably greater than his reliance costs; if she doesn’t perform, then the promisee’s costs are paid, and he has lost nothing. So long as he can expect full reliance damages in the case of nonperformance and to make some profit in the case of performance, it is in the promisee’s rational self-interest to rely, no matter how low the probability of performance. There is no reliability problem, and the decision whether or not to enter into the transaction will not be affected by the probability of performance.28 Consequently, any breach-of-contract remedy that provides anticipated compensation greater than or equal to reliance costs (and in most cases expectation damages and specific performance meet this description) dissolves the reliability problem. Why add an additional layer of fraud liability when fully compensatory damages can solve the problem? Let’s turn next to the price and selection decisions. Can these too be optimally incentivized with the right breach-of-contract remedy? Craswell has argued that in a competitive market, full expectation damages will also promote proper selection of contracting partners.29 The core idea is that promisors internalize the costs of their potential nonperformance and that these costs are then reflected in the prices they charge. Suppose June knows that the probability of her performance is 90 percent and that the cost of damages in the case of her nonperformance will be $100. In a competitive market, the price June charges will reflect her risk of paying damages—it will go up by $10 ($100 dam-

Why Promissory Fraud?

ages 0.1 chance of breach  $10). Anais is similarly situated, except that the probability of her performance is 95 percent. She will be able to charge a lower price, since her anticipated (that is, risk-adjusted) cost of breach is only $5 ($100 damages 0.05 chance of breach  $5). This $5 difference in price perfectly reflects the difference in Henry’s anticipated loss due to nonperformance (the lost value from nonperformance discounted by the probability of nonperformance) from doing business with June rather than Anais. Since that difference is reflected in June’s higher price, Henry will contract with June only if she offers him some offsetting value, an advantage worth $5 or more. This pricing mechanism functions as an invisible hand that guides Henry to the most reliable seller, without requiring that he know the probability of performance of any given seller. Notice that this pricing mechanism no longer functions if damages fall below expectation. Let us modify the above hypothetical and assume that damages in the case of nonperformance will be only $50 and that these will cover only Henry’s reliance costs, not his anticipated $50 profit. (Full expectation damages would be $100.) Now June’s anticipated cost of nonperformance is $5 ($50 damages 0.1 chance of breach  $5) and Anais’s anticipated cost of nonperformance is $2.50 ($50 damages 0.05 chance of breach  $2.50). On Craswell’s model, both will be reflected in price—June’s price will go up by $5, and Anais’s by $2.50. But now the difference in price no longer reflects the difference in the anticipated costs of nonperformance. It remains more efficient for Henry to contract with Anais unless June offers $5 or more in offsetting advantages, but the subcompensatory damages mean that June’s price is only $2.50 higher. Because Henry doesn’t know the difference in the probability of performance, he will make his decision based solely on this difference in price. If June offers only $3 in additional advantages, Henry will purchase from her, an inefficient outcome. Only full expectation damages, therefore, solve the price-selection problem.30 In a separate article, Craswell proposes an equally elegant breach-of-contract solution to the problem of giving promisees the information they need to invest optimally.31 Recognizing that a promisee needs to know the probability of performance in order to determine the optimal amount of reliance and that promisors typically know much more about this than promisees, Craswell asks whether it isn’t possible to structure breach-of-contract damages in a way that gives promisors an incentive to provide promisees accurate information on that score. His answer is what he calls “perceived optimal expectation damages.” Readers who paid attention in Contracts may recall that the reasonable-

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reliance rule—which Craswell labels “actual optimal expectation damages”— limits recovery for breach of contract to the value that the promisee’s expectation interest would have been if he had chosen the socially optimal level of reliance. The point of the rule is to give the promisee an incentive to invest optimally, rather than to underinvest in precautions and overinvest to increase his own profits. Craswell’s proposal is to make the reasonableness inquiry relative to the promisee’s epistemic situation. “As long as the two parties are in a contractual relationship, the promisor’s incentives to disclose the probability of performance can be optimized by a rule that holds her liable for the value the promisee’s expectation interest would have had if the promisee had chosen the level of reliance that appeared optimal, given everything the promisor has said about the probability of performance.”32 The idea is that promisors have a natural incentive to overstate the probability of performance, since such exaggerations can convince promisees to rely. Perceived optimal expectation damages addresses this by making the promisor pay, in the form of increased breach-of-contract damages, for overstating the probability of performance. The higher the promisor represents the probability of performance to be, the greater the promisee’s apparent optimal investment and the more the promisor will have to pay should she breach. This can be thought of as a sort of reverse Hadley rule. The Hadley rule gives promisees an incentive to disclose their unusual anticipated damages in case of breach by limiting recovery to what the promisor, given her epistemic situation, could have reasonably expected. In the same way, Craswell would incentivize promisors to disclose the probability of nonperformance by making the question of whether reliance was reasonable (and therefore recoverable) relative to the promisee’s epistemic situation. If it isn’t yet clear how this works, consider the following extension of our hypothetical involving wholesaler Martha and retailer George. Suppose Martha knows that the actual chance she will deliver the goods is 50 percent, and she is considering whether to misrepresent to George that there is a 90 percent chance of performance. If George were to believe that there was a 90 percent chance of delivery, his rational course would be to invest $75 in a newspaper advertisement that will increase his profits by $100 (the perceived gains from the advertisement—$100 0.9  $90—are greater than the $75 cost). Given that there is really only a 50 percent chance of performance, it is in fact not optimal for George to invest in the advertisement (the actual risk-adjusted gains—$100

0.5  $50—don’t justify the $75 cost). Now if breach-of-contract damages are pegged to George’s actual optimal expectation interest, then Martha’s mis-

Why Promissory Fraud?

representation does not cost her. Because there is actually only a 50 percent chance of performance, George should not invest in the advertisement and will not receive such costs as part of his award. But if breach-of-contract damages are pegged to George’s perceived optimal expected profits, then Martha will pay for the misrepresentation. If she breaches, Martha will have to pay an extra $25 in damages, which represents the extra profit George would have made had he made the perceived optimal investment. Since there is actually only a 50 percent chance that Martha will perform, the misrepresentation costs Martha $12.50 ($25 additional damages 0.5 chance of nonperformance). As Craswell summarizes the result, “[T]he more [the seller] overstates the likelihood of performance . . . , the greater will be the level of reliance that appears to be optimal . . . , and the greater will be [the seller’s] liability . . . in the event of breach.”33 This provides further support for the thesis that we don’t need separate liability for promissory misrepresentation. Credibility can be secured through correctly structured damages for breach of contract. Taken together, these arguments suggest the following objection to imposing legal liability for promissory misrepresentations. Because the functions such liability is meant to serve can be performed by a properly tailored breachof-contract remedy—be it specific performance or correctly structured expectation damages—separate liability for insincere promising is unnecessary. And since imposing such liability is not without its costs—including both the cost of enforcement, borne by legal institutions, and the cost of false positives, which will have a chilling effect on otherwise value-creating promisor behavior—it is better to achieve these objectives through a unitary law of breach of contract rather than by imposing an additional layer of legal liability. Why Legal Liability for Promissory Misrepresentation?

While the breach-of-contract solutions to promissory misrepresentation are elegant, they generally assume that social and legal mechanisms function in a sort of frictionless universe, one that does not describe the world that many contracting parties actually find themselves in. The actual contingencies, uncertainties, and complexities of contracting mean that what works in a law-review article often doesn’t work in the real world. Where this is the case, the law of promissory misrepresentation can fill the gap. This argument for imposing legal liability in cases of promissory misrepresentation is a modest one, which some might label “second-best,” based as it is on practical exigencies and legal limitations. We would maintain, however, that such an approach is all the

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stronger to the extent it locates a place for the law of insincere promising in the real world and is not subject to the objection that, while it may be true in theory, it is not so in practice. We begin by noting a few big assumptions Craswell has to make in order to reach his truly subtle conclusions that properly structured expectation damages can optimize both the price-selection decision and promisee reliance. A crucial premise with respect to the former is that the promisor’s anticipated cost of breach will be perfectly reflected in the price she charges. That is, a 5 percent increase in Anais’s chance of paying $100 damages will result in a corresponding $5 increase in her price ($100 damages 0.05 probability of liability  $5). While this may describe perfectly competitive markets and perfectly price-discriminating monopolists, there are very many contracting situations in which it does not hold true. In his analysis of optimal reliance, Craswell makes the similarly ambitious assumption that the promisor “can capture all of the incremental benefits [the promisee] expects from contracting with [her] rather than with someone else.”34 This allows him to maintain that the promisor will be able to recoup all of the value to the promisee of her promissory representations, from which he argues that her gains from representing a higher probability of performance are perfectly balanced against the costs imposed by the perceived optimal expectation damages measure.35 But in the real world, incremental benefits provided by one party are just as often shared between both, in which case Craswell’s proposed measure of damages will no longer result in the optimal incentives. Along somewhat different lines, while Craswell recognizes and attempts to account for informational disparities as to the probability of performance, his arguments generally don’t allow for other informational imbalances. For instance, both his price-selection analysis and his optimal-reliance proposal presuppose that the promisor knows how much she can anticipate paying in damages should she fail to perform. In the former, the promisor needs that information to figure the probable cost of breach into her price. In the latter, the cost of damages is necessary to her calculation of the cost of overstating the probability of performance. But in many cases, anticipated damages will depend on promisee idiosyncrasies—his expected profit from the deal, the likelihood that he will sue for breach of contract, and so forth. The costs of breach are not equal across all contracting parties. A promisee is more likely to have access to this information than the promisor, and where he doesn’t share it, Craswell’s breach-of-contract solutions cannot work. But these problems with the details of Craswell’s arguments are overshad-

Why Promissory Fraud?

owed by a more pervasive difficulty with the attempt to do everything with a breach-of-contract remedy. While a fully compensatory remedy is desirable in theory, in practice there will always be significant areas of contracting in which informed promisees will expect that their reliance costs will not be fully compensated in the case of nonperformance. This is true whether the remedy is monetary damages or specific performance. And while subcompensation might be attributed in part to institutional imperfections that could be fixed, it is also often the result of principled attempts to reduce opportunistic behavior by promisees. Just as coinsurance can dampen moral hazard and adverse selection by insureds, awarding less than full compensation can, in some situations, deter inefficient overclaiming by promisees. The widespread use of explicit waivers of consequential damages is evidence that subcompensatory damages can be of economic value, and we would expect similar opting out if the default remedy were specific performance. The likelihood of subcompensation in significant pockets of contract law is perhaps the most compelling reason for making available legal liability for promissory misrepresentations.36 Probably the most common institutional cause of subcompensation is underenforcement, the fact that in many cases there is a good chance that the breaching party will not have to pay damages. The reasons for underenforcement include nondetection of the breach, the nonbreaching party’s decision not to pursue a legitimate claim, evidentiary hurdles, and erroneous outcomes. Where the remedy is monetary damages, the effects of underenforcement can in theory be corrected by a damage multiplier—multiplying actual damages by the reciprocal of the probability of enforcement in that type of case.37 But courts have been reluctant to use such a mechanism in awards for breach of contract, and, of course, multipliers are not available where the remedy is specific performance.38 Moreover, we imagine that if courts started to use such multipliers, many private parties would attempt to contract around them—in part for bad adhesive reasons, but also in part because the lure of supercompensatory damages vis-à-vis individual claimants would lead to frivolous suits.39 And so damages are likely to remain subcompensatory in those cases where enforcement is unlikely. A second cause of subcompensation is the nonrecoverability of litigation costs, or the American Rule, which applies whether the remedy is money damages or specific performance. So far as breach of contract is concerned, the rule is only a default—absent terms to the contrary, neither party’s legal fees are recoverable. But the U.S. culture of contracting is to let legal fees fall where they may. Whatever the merits of this approach, the fact is that the American Rule

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further whittles away at compensation, both because litigation costs must be deducted from the net anticipated damages and because they are often so great as to dissuade potential plaintiffs from seeking damages in the first place.40 Another reason why monetary damages are often subcompensatory lies in doctrinal limits on recovery for nonpecuniary losses and for speculative or uncertain damages. Recovery in contract for emotional harm and other nonpecuniary losses is restricted to situations where the breach also caused bodily harm or was of such a kind that emotional harm was particularly likely to result.41 Speculative or uncertain damages are unrecoverable under the rule that breachof-contract damages must be proven with a higher degree of certainty than in tort, meaning that lost profits often cannot be recouped.42 While there are good arguments for each of these rules, their practical effect is further to decrease anticipated damages. A final cause of subcompensation is the imperfect functioning of damage mechanisms that aim to incentivize optimal promisee behavior, including the Hadley rule and the restriction on recovery to reasonable reliance. Under the Hadley rule, a promisor is not liable for consequential damages that were not within the contemplation of both parties unless the promisee communicated the risk of such damages at the time of contracting.43 The reasonable-reliance restriction, which we’ve discussed above, prevents recovery of the costs of inefficient reliance.44 When these mechanisms function properly, they cause promisees to behave optimally, meaning promisees can expect full recovery. But they are subject to real-world imperfections. Thus there are still plenty of instances where promisees do not disclose unusually high potential losses or invest too much in reliance, and therefore will be undercompensated in the case of breach. And because neither rule employs a bright line, promisees must also reckon with the possibility of fact-finder error. These flaws do not mean that the rules should be jettisoned—an imperfect incentive is often better than no incentive. But they are another reason why promisees often anticipate less than full compensation in the case of nonperformance. This long list reinforces what is already widely accepted: No matter whether we offer the nonbreaching party monetary damages or specific performance, compensation on the ground is often less than the promisee’s full expectation interest and even less than reliance, and private efforts to modify the default regime tend to make recovery even less compensatory.45 Whether this drift toward subcompensation is a symptom of market or legal failure or an efficient restriction on promisee opportunism, it is an important reason for the availability of legal liability for insincere promises.46

Why Promissory Fraud?

Indeed, the possible imposition of heightened promissory-fraud damages allows the law more flexibility to ratchet down ordinary damages. Where breachof-contract remedies are subcompensatory, credible promissory representations may be necessary to solve the reliability problem, to improve price and selection decisions, and to give the parties the information they need to invest optimally. The law can lend credibility to promissory representations by imposing liability when they are false. So long as the evidentiary regime can be structured to avoid false positives, it can achieve these benefits without interfering with the normal functioning of contract damages. Promisors who have not misrepresented their intent will still have the proper incentives for efficient breach, the reasonable-reliance rule can still function to deter promisees from overreliance, and so on. None of this is to deny that there are cases where the parties anticipate full compensation and where properly structured damage measures or other mechanisms can perform these functions. Where this is the case, liability for promissory misrepresentation may add no value. This is apiece with our analysis as a whole. As we emphasized in chapter 2, there are any number of reasons why a promisee might not need the promisor to tell him the probability of her performance, including a relationship of moral trust, past dealings, reputational or other nonlegal penalties, and sequential performance—not to mention fully compensatory damages. In any of these situations, the promisee might not care about the promisor’s credible promissory representation, in which case legal liability would do no work. We therefore recommend a regime in which it is easy for promisors to opt out of almost all legal liability for promissory representations. Where credibility is not an issue, we are happy to allow the parties to agree to contract around promissory-fraud liability by making it easy for the promisor to establish that that she is not making a promissory representation of one sort or another. (The details are the subject of chapter 5.) But because promissory representations are so commonly used and because breach-of-contract remedies are so often subcompensatory, we believe that the default rule should be that a promise does say something about the probability of performance and that, if that representation is false, the promisor should be held legally liable for the misrepresentation.

SANCTIONS AND SCIENTER

Having concluded that, in many situations, there are good economic reasons to back promissory representations with legal guarantees, the next issue is how it

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should be done. There are two questions, and their answers turn out to be closely related. First, should the legal response to promissory misrepresentations be in the form of a property rule—big penalties designed to completely deter promisors from misstating the probability of performance—or a liability rule—pricing promissory misrepresentations at their social cost? Second, what degree of culpability should we require before legal liability is triggered— should promisors be held strictly liable for all promissory misrepresentations or should liability be limited to cases where the promisor exhibits a certain degree of culpability, be it knowledge of the deception, recklessness as to the truth of what she said, or mere negligence? We begin with the decision of whether, in the language of Guido Calabresi and Douglas Melamed, to use a property or a liability rule.47 We believe that a promisee’s interest in truthful promissory representations is best protected by a property rule. Our core reason for this has to do with considerations of institutional competence that have been emphasized by Robert Cooter. Liability rules work by forcing people to internalize the costs of their actions. Socially desirable behavior is achieved by making a person reckon with the social costs of what she does. Property rules, on the other hand, work by telling actors the minimum standard for their behavior and persuading them to meet that standard by penalizing them when they fall below it. Thus: “If lawmakers can identify socially desirable behavior, but are prone to error in assessing the costs of deviation from it, then sanctions [property rules] are preferable to prices [liability rules]. However, if officials can accurately measure the external costs of behavior, but cannot accurately identify the socially desirable level of it, then prices are preferable to sanctions.”48 There are strong reasons for lawmakers to believe that optimal quantity of reckless or knowing promissory fraud is zero— and hence to use property rules to prevent defrauding promisors from engaging in this activity. Promisees would not consent to enter into these contracts if they knew the promisor’s true intent or the true probability of performance. Liability rules are therefore inappropriate, since they would allow defrauding promisors to take promisees’ entitlement to nonfraudulent representations for the price of compensatory damages. Reasonable or negligent promissory misrepresentation, on the other hand, is best deterred by a liability rule. In order to get at the argument for property-rule damages, we can begin with Craswell’s observation that the cost of obtaining contractual consent varies depending on the nature of the obstacle in question.49 In the case of duress, for instance, consent is cheap. It is expensive to engage in duress (one must purchase the gun and bullets, take the effort to put it to the other party’s head, and

Why Promissory Fraud?

so forth), so it is costless to remove duress as an obstacle. In cases of physical necessity, on the other hand, the cost of obtaining consent is typically quite high. If a shipwrecked sailor lacks other means of getting off his island, then his consent to the price for rescue is less than perfect, but the cost of obtaining real consent (getting a few more potential rescuers, among whom he might choose) is prohibitively high. Because the market solution is expensive, we do not demand true consent but protect the sailor’s right to a fair bargain with a liability rule. When it comes to promissory misrepresentation, we want to argue, the cost of obtaining consent depends on scienter: it is cheap to avoid knowing and reckless promissory misrepresentations, relatively inexpensive to avoid negligent ones, and costly to avoid misrepresentations that are a matter of reasonable mistake. A promissory misrepresentation is made knowingly only if the promisor knows what she is saying and knows that the probability of performance is less than she has said it to be. Where this is the case, it costs nothing to make an accurate, rather than a misleading, promissory representation. The promisor has all the information necessary to do so. Since the cost of consent is so low and there are strong reasons to suspect that knowing consent to fraud would never be given, it follows that promisees should be protected against knowing misrepresentations by a property rule.50 Reckless promissory misrepresentations are similarly cheap to avoid. As we pointed out in chapter 3, if a promissory misrepresentation is nonknowing, a matter of mistake, then the promisor misunderstands what she says or is overly optimistic about the chances she will perform. We follow the draft Third Restatement of Torts, which stipulates that a mistake is reckless if (a) the actor knows of the risk of mistake or of facts that make that risk obvious and (b) the cost of eliminating that risk is so slight as compared to the potential harm that the actor’s failure to eliminate it demonstrates an indifference to the risk.51 From the second condition it follows that where the only obstacle to consent is a reckless misrepresentation, the cost of obtaining consent—of correcting the mistake and making an accurate promissory representation—is relatively low. Now the same sort of argument might be taken to recommend property-rule deterrence for negligent promissory misrepresentations. Under Learned Hand’s definition, which is also that of the draft Third Restatement of Torts, a promissory misrepresentation is negligent just when the cost of avoiding it—that is, the cost of consent—is less than the cost of injury multiplied by its probability.52 That is, if a promissory representation is made negligently, then the costs

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of obtaining consent are, by definition, less than the expected harms from misrepresentation. On the pure market-forcing theory, this should entail a property rule. It is here that institutional competence again enters the picture. Propertyrule protection works only if legal institutions are able to identify accurately instances of socially undesirable behavior. This requires competence, first, in defining the appropriate categories of behavior to be sanctioned and, second, in determining to which category a given defendant’s behavior belongs. The first is no problem. As the above analysis shows, knowing, reckless, and negligent promissory misrepresentations are all socially undesirable, in the sense that their social costs outweigh any benefit they may confer on the individual promisor. The question is whether courts and juries are capable of accurately determining to which category a case belongs. If decision makers are likely mistakenly to impose deterrence penalties on innocent promisors engaging in socially desirable behavior, then the property rule will likely have a chilling effect on promising in general and we should prefer a liability rule. Innocent promisors are protected by excluding negligent misrepresentation from property-rule penalties. It is difficult in many cases to determine precisely where the line between negligent and reasonable mistake lies. This is due, first, to the difficultly in measuring, especially in retrospect, the degree and cost of a risk and, second, to the fact that the gap between the cost of the risk and the cost of avoidance may be quite small. Because legal institutions cannot determine with sufficient accuracy precisely when a mistaken promissory misrepresentation is a matter of negligence rather than reasonable mistake but are relatively competent at assessing the costs of a negligent promissory misrepresentation—the promisee’s damages due to nonperformance—negligent misrepresentations should be priced rather penalized, that is, subject only to liability-rule protection. This cautionary argument does not apply to reckless and knowing promissory misrepresentations. The very definition of recklessness requires that there be a large gap between the cost of the risk and the cost of avoidance, which means that errors at the margin don’t threaten innocent promisors.53 And where there is legally sufficient evidence that the promisor knew that her representation was false, the risk of erroneous decisions is again minimized.54 Decision makers in such cases are unlikely to mistake socially beneficial for socially harmful behavior. By requiring claimants to show either that the defendantpromisor made the misrepresentation knowingly or that she acted with reckless disregard of its truth, courts can shield the vast majority of promisors from po-

Why Promissory Fraud?

tential liability for promissory fraud. A promisor need only take minimal steps to assure herself of the meaning of her promissory representation and whether it is true to avoid liability. Our argument from first principles has brought us to a conclusion quite close to the common-law approach to nonpromissory fraud.55 We think the law should take a bifurcated approach to what promises say. Where a claimant can show that the promisor acted knowingly or recklessly in making the misrepresentation in question, the defendant should be liable for property-rule penalties. This accords with the common wisdom that punitive damages are best reserved for defendants who, in Justice Richard Neely’s memorable phraseology, are either “really stupid” or “really mean.”56 From here on we use the term promissory fraud to refer to such knowing or reckless promissory misrepresentations and to the civil cause of action to which they give rise. Where the claimant cannot show knowledge or recklessness, the defendant should be liable only for the costs of her misrepresentation, that is, the harm it caused the claimant. We refer to these instances and the coordinate cause of action as promissory misrepresentation. The law of promissory fraud attempts to deter promisors from ever knowingly or recklessly misrepresenting the probability of performance. The law of promissory misrepresentation aims to force all other promisors to internalize the costs of their misrepresentations, thereby giving them an incentive to invest optimally in ensuring that their promises are true.57

THE MEASURE OF DAMAGES

Having determined that promisees should be protected against promissory fraud by a property rule and against mere promissory misrepresentation by a liability rule, we do not yet know exactly what remedies should be available in each case. Nor do we yet know whether parties should be allowed to specify alternative damage measures—whether our proposed remedies should be mandatory or default. Here we work out these practical details. Let’s take the second question first. With respect to promissory fraud— knowing or reckless promissory misrepresentation—it should not be possible to opt out of property-rule sanctions. We argue in the next chapter that courts should approach the representation inquiry (the analysis of what a promise said) in a way that makes it quite easy for promisors to avoid almost all liability for insincere promising. If a promisor is worried about the potential costs of promissory fraud, she can limit her liability by making an opaque as opposed to a positive promise, by expressly affirming that her promise is only semi- or non-

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warranting, or by expressly disclaiming any express-probability representation. Because we recommend simple tools with which promisors can opt out of most promissory representations, we need not provide separate mechanisms for opting out of legal liability for such misrepresentations. And we have independent reasons for a mandatory promissory-fraud damage rule. In the next chapter we also advocate a modest but mandatory representational floor: every promise says at least that the promisor does not intend not to perform. That is, under our proposed interpretive regime, there are no blank promises; every promise is at least opaque. Allowing promisors to opt out of sanctions for promissory fraud would allow them to contract around that mandatory floor. That said, requiring some penalty for promissory fraud does not mean that we cannot allow the parties to specify which penalty. We see no reason why it shouldn’t be possible to contract around court-calculated promissory-fraud sanctions. Party-specified sanctions might take the form of a stipulation to the amount of monetary damages or to specific performance. Courts should recognize and enforce such contractual terms, though they should scrutinize them to ensure that the agreed upon sanction is sufficiently high to achieve deterrence. Parties should not be allowed to use liquidated damage clauses to opt out of property-rule sanctions altogether. With respect to mere negligent or reasonable promissory misrepresentations, the liability-rule remedy should be treated as a default that the parties can opt over or under. Opting over liability-rule protection means subjecting nonfraudulent promissory misrepresentations to penalties rather than prices. Again, this will require an enforceable penalty clause specifying monetary damages or specific performance, now triggered by a court finding of promissory misrepresentation simpliciter—whether or not fraudulent. Enforcing such clauses gives promisees a tool for insisting on greater care in making promissory representations and gives promisors a means of providing greater assurance that their promissory representations are credible.58 Penalty and specific-performance clauses also allow the parties to skirt the scienter requirements, which in some situations may be difficult to meet. Parties should also be allowed to opt under liability-rule protections against promissory misrepresentation, which is to say that they should be able to opt out of all damages for their nonfraudulent misleading promises. A decision not to hold one another liable for reasonable or negligent misrepresentations does not mean that the parties have opted out of liability for breach of contract.

Why Promissory Fraud?

Given that the two damages measures are relatively close (see below), we should allow parties to choose to avoid the litigation and other costs of additional liability for promissory misrepresentation.59 We now turn to the first question posed above: What are the appropriate remedies for promissory fraud and nonfraudulent promissory misrepresentation? All promissory misrepresentations, whether fraudulent or not, should give rise, at the option of the claimant, both to rescission and to tortlike compensatory damages.60 Where the misrepresentation also constitutes promissory fraud, the promisee should have a choice between tortlike compensatory damages, punitive damages, and specific performance. It may appear odd to say that we need a separate action for promissory misrepresentation. Like any other action for nonfraudulent misrepresentation, establishing promissory misrepresentation requires proof of proximate cause. Because promissory representations concern the probability of performance, the relevant harm will typically be that the promisor has failed to perform. Thus in the normal case, damages will lie only if the defendant has broken her promise.61 But then she is already liable for compensatory breach-of-contract damages. That is, she has already been required to internalize the costs of her nonperformance. Part of the answer to this is that there can be liability for promissory misrepresentation even where there is no enforceable contract or promise. A promise might not be legally enforceable for any number of reasons—lack of consideration, the Statute of Frauds, considerations of public policy, and so forth. As we discuss in chapter 7, a promise that is unenforceable as such can still give rise to an action for promissory misrepresentation. In these cases, liability-rule damages for promissory misrepresentation are not redundant. There is also, however, a more general answer. As we have already emphasized, breach-of-contract damages are subject to a variety of limitations that tend to make them subcompensatory. Fully compensatory damages for promissory misrepresentation can be structured to fill the gap between contract damages and full compensation. Thus by classifying promissory misrepresentation as a tort, we can provide recovery for emotional and other nonpecuniary damages, for less-than-certain lost profits,62 for foreseeable though unusual consequential damages, and for reliance that might not meet the stringent reasonableness standard applicable in contract.63 Because we want promisors to internalize all the costs of their misrepresentations, our ideal law of promissory misrepresentation would also suspend the American Rule and allow successful claimants to recover their litigation costs. Finally, and for the same reason, our

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ideal damages regimes would use a damage multiplier where enforcement is particularly unlikely.64 Suspending these familiar limits on breach-of-contract damages where there is proof of promissory misrepresentation does not threaten the incentives those limits aim to establish. Promissory misrepresentations are the exception rather than the rule. If compensatory damages for promissory misrepresentation function properly, most promisors will take reasonable care not to misstate the probability of their performance and the likelihood of misrepresentation will be low. This means that most promisors will have to reckon only with traditional breach-of-contract remedies. What about promissory fraud? We have argued that where a promissory misrepresentation is made knowingly or recklessly—where it constitutes fraud— the promisor should also be subject to property-rule sanctions, which are penalties of sufficient magnitude to deter others from making such misrepresentations. We consider three types of sanctions—rescission, specific performance, and punitive damages—and conclude that only punitive damages can have a general deterrent effect. Craswell, in his discussion of unconscionability and other formation problems, suggests that the minimum property-rule sanction for interfering with the promisee’s consent is rescission, since rescission gives the promisee the right to cancel the contract at any time, thereby forcing the promisor to bargain with him for performance.65 But rescission cannot serve as a deterrent to promissory fraud. Since an action for promissory fraud typically lies only where the promisor has already failed to perform, the promisee already has the right to rescind, and that remedy can have no additional deterrence effect.66 Specific performance is often viewed as providing property-rule protection against breach of contract, but it cannot function as a general deterrent to promissory fraud.67 There may be instances—as where the promisor does not intend to perform because she expects that performance might become too expensive—where imposing a specific performance remedy would discourage promissory misrepresentation. But because enforcement is never perfect and damage multipliers are unavailable, a promisor will discount the anticipated costs of specific performance by the chances that they won’t be imposed. And where a promisor expects not to perform because of, say, impossibility, she won’t anticipate being subjected to specific performance in any case. Because we want deterrence, specific performance cannot be the sole remedy for promissory fraud. The only generally effective property rule for promissory fraud is punitive

Why Promissory Fraud?

damages—money damages that are so high that promisors will never find it in their interest intentionally or recklessly to misrepresent the probability of performance. The term punitive damages is sometimes used for liability damages multiplied by the probability of enforcement.68 This is not how we use the term. We mean it to refer to damage awards that are so great that they deter all potential violators. The minimum amount for such deterrence is the offender’s expected gain multiplied by the reciprocal of the probability of enforcement. This is only a minimum, since when it comes to property rules we need not worry about overdeterrence.69 We are, however, concerned with the potential chilling effect of promissory fraud on contracting in general, since it is impossible to eliminate the risk of false positives. We therefore recommend limiting punitive awards to this minimum necessary amount. We also recommend that such punitive damages be available only as an alternative to a compensatory award for the promissory misrepresentation (and possibly also breach of contract). A successful claimant would thus have the option of choosing the higher of punitive or compensatory damages, guaranteeing an award sufficient for deterrence but limiting the incentive to bring frivolous claims. Claimants should also be given the option of requesting specific performance plus compensation for costs arising from the breach. Again, a claimant will request specific performance rather than punitive damages only where specific performance is worth more to him than monetary damages would be. It is therefore doubtful that a specific-performance option will dilute deterrence. * * * This chapter has attempted to defend a default regime of potential promissoryfraud liability from the objection that its benefits can be better achieved by properly tailored expectation damages or specific performance. Our core response is that for a substantial portion of contracting activity, a default of expectation damages or specific performance is not likely in equilibrium to perform all of the functions that promissory representations serve—to solve the reliability problem, to promote optimal price and selection decisions, and to provide the parties the information they need to invest optimally in the transaction. This is both because we can predict that some parties will specify limitations on damages and because numerous structural factors are likely to cause even the default contract remedies to fall short of the ideal. A default potential liability for insincere promising corrects for these predictable remedial shortfalls, while allowing the parties to waive such liability in the unusual case that remedial assurance or other mechanisms are sufficient.

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While the upshot of our analysis is that tortlike damages, including punitive awards, should be available in cases of promissory fraud, our arguments have been based on contractarian principles. The entire argument has been structured around the goals of enabling promisors to assure promisees of their performance, of promoting efficient price and selection decisions, and of providing the information parties need to invest optimally—all of which are necessary to the efficient functioning of contracts. Our conclusion that punitive damages are appropriate responses to promissory fraud thus gives lie to the commonplace assumption that where contracts are concerned, only liability rules are appropriate.

Chapter 5 The Representation

Inquiry: What Does a Promise Say?

Having analyzed why the law should concern itself with insincere promises and what form legal sanctions should take, we now turn our attention to the epistemic question of how courts should go about determining whether a defendant has committed promissory misrepresentation or promissory fraud. This chapter discusses the logically first question of what the promisor said, explicitly or implicitly, about the probability of performance. We call this the “representation inquiry.” Chapter 6 then analyzes how a claimant can prove that the representation in question was false (the veracity inquiry) and that the promisor acted culpably in making it (the scienter inquiry). Very little attention has been paid to how courts interpret what a fraud defendant said or to the considerations that go into adopting one set of interpretive rules or another. We suggest that when it comes to the generic actions for misrepresentation and deceit (of which promissory misrepresentation and promissory fraud are species), rules of interpretation should be chosen in the light of four considerations: fidelity to what was intended and understood, incentive effects on the transfer of information, incentive effects on nonsemantic behavior, 83

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and unintended consequences. We apply these considerations to argue for a dual representational default, according to which, absent evidence to the contrary, a promise is interpreted as both positive and semiwarranting. We also analyze what sorts of evidence courts should require to show that a promisor opted out of the interpretive default and made one of the other sorts of promissory representation—opaque, fully warranting, nonwarranting, or definiteprobability—identified in chapter 2. We also argue that promisors should not be allowed to contract for blank (or near-zero-probability) promises.

EXISTING INTERPRETIVE PRACTICES

Before developing our theory of how courts should interpret what promises say, we want to take a few pages to describe in more detail how they currently engage in the representation inquiry—both in the majority of jurisdictions that recognize promissory fraud and in the minority that recently didn’t or now don’t. We begin with those jurisdictions that recognize the action, which, as we have noted, today constitute the overwhelming majority.1 To the extent that courts in these jurisdictions engage in the representation inquiry at all, they presuppose the categorical interpretation as at least an interpretive default and are unclear about what, if anything, a promisor can do to opt out of that default. The categorical interpretation holds that a promise says that the promisor intends to perform and nothing else. If you adhere to the categorical interpretation, then the representation inquiry boils down to one question: Was there a promise?2 This question can be played out in familiar forms. Thus courts have rejected allegations of promissory fraud on the grounds that the defendant’s statement was not a promise but mere dealer’s talk or puffery,3 or no more than an expression of optimism or enthusiasm.4 In addition, courts have found that statements leaving crucial terms unclear, like price or time of performance, are too vague to constitute a promise and are therefore unable to support a finding of promissory fraud.5 Alternatively, at least one court has held that an implied promise can support an action of promissory fraud.6 In all of these cases, courts are engaging in a sort of representation inquiry. But framing that inquiry as just a matter of whether or not there was a promise grossly oversimplifies matters. There are two core problems. First, as we argued in chapter 2, the categorical interpretation does not take account of everything that promises say. It doesn’t capture all that a promise might or might not say about the promisor’s intent—that she intends to per-

The Representation Inquiry

form (positive promises), that she doesn’t intend not to perform (opaque promises), or nothing (blank promises). And it threatens to obscure other material things a promise can say about the probability of performance—that the promisor is so likely to perform that the promisee can safely rely (warranting promises), that the promisor doesn’t believe that the probability of performance is so low that it’s not in the promisee’s interest to rely (semiwarranting promises), and more precise representations of the probability of performance (definite-probability promises). We will argue in this chapter that most (but not all) of these sorts of promise can create value for both parties. By ignoring them, the categorical interpretation not only fails to support value-creating representations but even threatens to deter them. Second, promisors can say things about the probability of their performance well before and long after the moment of promising, and promisees justifiably rely on such representations. A potential promisor may in precontractual negotiations want to convince the other party to refrain from looking for other contracting partners or to take steps that will result in joint gains of trade should they succeed in forming the contract. To this end, she might represent that she intends to contract (and to perform) or that there is a high likelihood of her agreeing to a contractual offer, a representation that is certainly material and can create value, though it does not accompany a promise to perform. After formation, a promisee with reason to anticipate nonperformance can require additional assurance of performance,7 or the promisor might spontaneously volunteer that she will in fact perform, so as to convince the promisee not to cancel the contract or sue for damages.8 Again, a true representation as to the probability of performance in such a situation is both material and value creating. We will discuss legal liability for pre- and postformation promissory representations in chapter 7. For the moment, we simply note that posing the representation question simply in terms of whether or not there was a promise excludes without reason such nonpromissory material misrepresentations. Courts that don’t recognize the action for promissory fraud (of which there were once many and are now few) are no more sensitive to what promises say. One way of reading the minority rule is as a theory that, so far as the law is concerned, every promise is blank—that it says nothing about the promisor’s intentions. And one occasionally sees the rule expressed this way. “[A] mere promise to perform an act in the future is not, in a legal sense, a representation, and a failure to perform it does not change its character. Moreover, a representation that something will be done in the future, or a promise to do it, from its nature cannot be true or false at the time when it is made.”9 As an interpreta-

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tion of our promissory practices, such an approach suffers the same infirmity as the categorical interpretation: it simply isn’t true that all promises say, or don’t say, the same thing about promisor intent. And if this is meant as an account of the everyday meaning of promises, it is more seriously flawed. The categorical interpretation is at least in tune with our prelegal intuitions as to what a promise says about promisor intent. But one cannot simply equate adherence to the minority rule with the idea that all promises are blank. The rule that promises do not give rise to an action in fraud traditionally went hand in hand with the rule that expressions of intention were not actionable, the idea being that neither was a statement of an existing fact. Thus, for instance, in 1897 the Colorado Supreme Court explained the minority rule as follows: “As distinguished from the false representation of a fact, the false representation as to a matter of intention, not amounting to a matter of fact, though it may have influenced a transaction, is not a fraud at law.”10 The thought here is that a promise does say something—that the promisor has a certain intention—but that it is the wrong sort of thing to serve as the basis for an action for deceit. If there is an error here, it is not an interpretive but an ontological one and was perfectly diagnosed by Lord Bowen in Edgington v. Fitzmaurice: “The state of a man’s mind is as much a fact as the state of his digestion.”11 As we discussed in the previous chapter, courts have also put forward any number of other, less metaphysically ambitious reasons for refusing to recognize the action for promissory fraud—from worries about the difficulty in proving intent to the idea that it is, as a matter of law, unreasonable for a promisee to rely on such representations. Courts that adhere to the minority rule on the basis of such policy considerations generally have little or nothing to say about the representation inquiry.

A PROPOSED INTERPRETIVE REGIME

Having rejected the interpretive approaches of both the categorical interpretation and the minority rule, we are in need of a more nuanced procedure for legal determinations of just what it is that a given promisor said with her promise. We know of no general metatheory of how courts should go about formulating interpretive rules for the enforcement of the law of deceit.12 Our own thinking on the matter leads us to distinguish four distinct, sometimes competing factors to consider in setting them: fidelity, informational effects, behavioral effects, and unintended consequences.

The Representation Inquiry

By fidelity we mean fidelity to the everyday, commonly understood meaning of the speech act in question. Promissory fraud, like the generic action for deceit, is meant to enforce the maxim that a speaker should mean what she says. The representation inquiry, therefore, should be sensitive to what actually gets said—to local linguistic conventions, to what the promisor meant to say, and to what the promisee understood her to say. Both efficiency and fairness are promoted when promisor and promisee can rely on their reasonable interpretations of a promissory act.13 The second factor to consider is the informational effects of an interpretive rule. The way that speech acts are interpreted in actions for deceit has consequences for the flow of information. These are most obvious in the case of mandatory interpretive rules. A blanket refusal to recognize that promises can say certain things diminishes promisors’ ability to convey such information to promisees, since the veracity of their promissory representations isn’t backed by a legal guarantee. Thus the old rule that a representation of intention could not serve as the basis for an action of deceit effectively treated all promises as blank promises and reduced the ability of promisors to convey information about their intentions, since the informed promisee knew that a positive representation was not legally enforceable. Interpretive defaults and the rules for contracting around them also have informational effects, since promisors can be required to disclose information to contract around the default.14 Suppose we read the categorical interpretation as an interpretive default, according to which a promisor says she intends to perform unless she explicitly disavows such a representation. (This is not the interpretive approach we shall advocate.) That rule would provide promisors an incentive to put promisees on notice if they do not intend to perform by explicitly making a blank or an opaque promise, another sort of informational effect. A third consideration in setting interpretive rules is their behavioral effects. By mandating what promises say, interpretive rules can influence what promisors do. A rule that all promises say that such and such is the case tells potential promisors that they had better be sure that that representation is true before promising, lest they later face liability for promissory fraud. Consider, for instance, the effects of the categorical interpretation read as a mandatory rule. The rule would then be that every promise necessarily represents an intention to perform, no matter what the context and no matter what else the promisor says. This gives the potential promisor who does not intend to perform a strong disincentive: by promising, she exposes herself to liability for promissory fraud

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should she breach. The upshot is the same as if there were a first-order rule— that is, one that had nothing to do with what was said—against entering into a contract without an intent to perform. The law of fraud can thus be used to enforce indirectly behavioral norms—like the norm that the promisor should intend to perform. Fourth and finally are the potential unintended consequences of fraud liability. Promissory fraud introduces a property rule into the sphere of contracts. We should worry about its potential chilling effect on contracting in general— its propensity to deter both possible promisors from entering into mutually beneficial agreements and actual promisors from efficient breach. These effects will be all the more likely if the legal meaning of a promise is vague or uncertain. Whatever the interpretive rule is, it should be clear, distinct, and predictable in its application. And interpretive rules should not threaten too many promisors with liability for promissory fraud, lest they chill otherwise desirable behavior. These are the four considerations that we shall attempt to satisfy with our proposed rules for the representation inquiry. Our analysis proceeds in three steps. We first ask whether there should be any mandatory interpretive rules and argue for just one: All promises represent at least that the promisor does not intend not to perform. That is, all promises are at least opaque. The argument for this mandatory floor is based on its behavioral effects: We want to discourage promisors who, at the time of promising, intend not to perform. Such promises create no value that cannot be realized in less costly ways. We next ask what the default interpretation of a promise should be. We argue for two default representations, positive and semiwarranting. Absent evidence to the contrary, a promise says, first, that the promisor intends to perform and, second, that she does not believe that the probability of her performance is so low that it is not in the promisee’s interest to rely. In addition, we recommend that absent evidence to the contrary, a positive promise should be taken to represent that there is at least a 50 percent chance that the promisor will perform—a sort of weak definite-probability default. Our analysis of interpretive defaults is based both on informational considerations—we are looking for a default that encourages parties with low-cost access to information to exchange it with one another—and on fidelity to everyday promising practice. Finally, we discuss what courts should require to contract around these de-

The Representation Inquiry

faults. This is equivalent to asking what evidence courts should consider when engaging in the representation inquiry. We evaluate the evidentiary value of what the parties said, of the context of contracting, and of the parties’ motives. Mandatory Interpretive Rules

Of the four considerations we’ve described—fidelity, informational effects, behavioral effects, and unintended consequences—the law of deceit has traditionally emphasized the first. In determining what a given speech act said, the goal is to remain true to the ordinary person’s reasonable understanding of it.15 And it is true that it is fundamentally unfair to hold a speaker liable for saying something that no ordinary person would understand her words to mean. But this is not where we begin our analysis. We start by asking whether courts should impose any mandatory interpretations on the act of promising. Such a mandatory rule will establish either that every promise has some representational content (for example, that the promisor intends to perform) or that no promise does, no matter what words the promisor utters or in what context she utters them. It is the very nature of such blunderbuss rules to risk infidelity to the extralegal meaning of words, since they apply no matter what is said and no matter what the context. The more relevant considerations here are the informational and behavioral effects of different mandatory rules. A rule that a promisor cannot say that such and such is the case typically limits what sort of information is available to the promisee: a promisor’s attempts to convey the nonrecognized information is less effective, since it is not backed up by a legally enforceable guarantee. A rule that all promises must say that such and such is the case primarily affects promisor behavior: a promisor must ensure that the required representation is true before making a promise, or else face liability for promissory fraud. Now a radical libertarian might reject the imposition of any mandatory rules as to what a promisor can or cannot say with her promise. The intuition would be that promisors should be free to choose what to say or not to say about their intentions, about the probability of their performance, and about whether they think it in the promisee’s rational self-interest to rely. If the law of promissory fraud were simply meant to guarantee promissory representations, its interpretive rules would best be oriented only toward allowing contracting parties to express clearly what they want to say. There is something to this intuition, and we shall argue that courts should recognize almost all of the promissory representations we’ve identified. But

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they should refuse to countenance one category, namely, promises that say nothing at all about promisor intent—blank promises. Blank promises create no value that cannot be achieved with an opaque promise. And there are significant costs to allowing persons to make promises they intend not to perform, costs that can be avoided by refusing to recognize blank promises. We therefore advocate one mandatory rule: Every promise represents at least that the promisor does not have an intention not to perform. In order to get at our argument for this rule and no others, we divide our typology of promissory representations into two large classes. Definite-probability, fully warranting, and positive representations all disclose more rather than less information about the probability of performance. We term these information-rich representations. They tell the promisee that the probability of performance is at least some value (definite-probability), that the probability of performance is so great that the promisee can safely rely on it (warranting), or that the probability of performance is secured by the promisor’s intention to perform (positive). Non-definite-probability promises, nonwarranting and semiwarranting promises, and blank and opaque promises, on the other hand, are information poor. Each provides less information about the probability of performance than its information-rich counterpart.16 We can now pose three separate questions about what, if any, mandatory rules courts should use. First, should courts support promisors’ attempts to make information-rich promissory representations by recognizing them as grounds for liability when false? Second, assuming courts should recognize fully warranting, definite-probability, or positive promissory representations, should they require promisors to make any of them? That is, should courts allow promisors to opt out of these information-rich representations? Third, assuming that courts should not require promisors to make these informationrich representations, should they nonetheless require them to make some information-rich representation—for example, disclosing just what their intention or belief is—or should they recognize information-poor promises? We discuss the first and second questions here. The third ends up being quite close to the question of how promisors should be able to opt out of representational defaults. We thus delay answering it until we discuss contracting around the default. Should courts recognize fully warranting, definite-probability, and positive promissory representations? This is an easy question. As a general matter, more information is better than less. The more contracting parties know, the more likely

The Representation Inquiry

it is that their agreement will be value creating. The information at issue in promissory representations concerns the probability of the promisor’s performance. Promisors typically know much more about this than promisees. From an economic standpoint, and for all of the reasons canvassed in chapter 4, it is desirable that promisees also have access to that information. The informational effects of recognizing warranting, definite-probability, and positive promissory representations are, therefore, beneficial ones. The behavioral effects are also positive. None portrays promisor behavior that we want to deter. Thus we want to encourage promisors who reasonably believed that the contract is a good bet for the promisee, who have an expressed opinion as to the objective probability of performance, and who intend to perform. Allowing promisors to make any of these information-rich forms of promissory representations and backing those representations up with the legal guarantee of promissory fraud, therefore, also encourages desirable behavior on the part of promisors. Of course by recognizing these sorts of representations as a possible basis for legal liability we create the possibility of deterring sincere promisors with the worry that they will mistakenly be attributed with a false information-rich promissory representation. We shall argue below, however, that this unintended consequence can be avoided with the proper default and opt-out rules and with judicial attention to sufficiency of the evidence requirements. Should courts recognize information-poor promissory representations? The information-poor forms of promising—non-definite-probability, nonwarranting and semiwarranting, opaque and blank—present more difficult questions. For one thing, they allow promisors to engage in behavior that might appear undesirable. Blank and opaque promises effectively give promisors permission not to intend to perform or even affirmatively to intend not to. With a semiwarranting promise, a promisor can make a promise even though she isn’t sure that it is a good deal for the promisee to rely, and a nonwarranting promise allows her to do so even if she believes that it’s a bad deal for the promisee. For another, each of these forms of promising gives the promisee relatively less information than its information-rich counterpart, thereby allowing potentially pernicious informational imbalances to persist. So, should courts adopt mandatory rules that every promise is definiteprobability, fully warranting, or positive? To allow promisors not to make such representations is to give them more latitude with respect to the situations in which they enter into a contract. A non-definite-probability promise allows a

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promisor to enter into the contract even if she thinks the probability of her performing is less than the rule would represent it to be. A nonwarranting promise allows her to promise even if she believes that, all things considered, the promisee is likely to lose on the deal, and a semiwarranting one if she is not sure. An opaque promise means that she can enter into a contract that she does not intend to perform (though she must not intend not to perform), and a blank promise allows her to contract regardless of her intent. The question is whether any or all of these behavioral consequences are so undesirable that the law shouldn’t recognize a promisor’s attempt to opt out of the information-rich representation. Whether we should require that every promise be a definite-probability one is the easiest question. Such a mandatory rule would set some minimum probability of performance M and stipulate that every act of promising—no matter the context and no matter what other words are uttered—says that the probability of performance is at least M. Thus if we were to set M at 0.5, every promise would represent that there was at least a 50 percent chance of performance. Any potential promisor who thought that the likelihood of her performance was less than even would have a new reason not to promise. While such a rule has the virtue of simplicity, we see no reason to require that all promisors believe the probability of their performance is at least 50 percent—or 75 percent, or 90 percent, or any other mandatory minimum. For one thing, it is not at all clear where to set the minimum. For another, as we argue below, promises can be value creating even where the probability of performance is quite low. So long as the promisee is on notice that the probability of performance is not great, the law shouldn’t interfere. Similarly, we oppose a mandatory rule that interprets every promise as fully warranting. Requiring promisors to ensure that proposed transactions are in the promisee’s best interest would impose on them unwieldy information costs. In order to determine whether Pp  Pp*, a promisor must know Pp*, the promisee’s participation constraint. This requires that she be informed about such things as the promisee’s costs of performance, his costs in case of breach, his gains should the promisor perform, and so on—matters on which promisees are generally much better informed than promisors. We see no reason why a promisor should be forced to learn this information or why a promisee should be forced to disclose it to make the deal go through.17 This conclusion does not yet say whether we shouldn’t require at least a semiwarranting representation that the promisor (given whatever information she has) does not believe it isn’t in the promisee’s interest to rely. But before ad-

The Representation Inquiry

dressing this possible rule, we want to turn to representations of intent. Should every promise represent an intent to perform? Should it at least represent that the promisor does not intend not to perform? Or should the law recognize blank promises? The categorical interpretation, which on its face requires that every promise represent an intent to perform, has some intuitive appeal. Stipulating that every promise is positive merely requires that promisors have a certain attitude that we expect them to have anyway. This expectation can be traced, first, to the moral principle pacta sunt servanda, second, to the observation that there usually is no point to making a promise one does not intend to keep, and, third, to the fact that most promisees won’t rely unless they think the promisor intends to perform. There is therefore considerable intuitive appeal to the idea that we should enforce the behavioral norm that one not make a promise unless one intends to perform it. The response to this intuition is that there are many situations in which a promisee can find it in his interest to rely even though the promisor does not intend to perform. So long as the promisee is not duped—so long as the promisor has not misrepresented her intentions—courts should not discourage such agreements. The potential value of such promises can be seen in the structural similarity between an opaque promise and an option contract. Just as an option writer can find it in his interest to enter into an option contract knowing that the option holder does not necessarily intend to exercise her option, so a promisee can find it in his interest to rely on an opaque promise, even though he knows that the promisor might not intend to perform. Recall our example from chapter 1, in which Leona promises either to buy Donald’s piece of real property at year’s end for $100,000 or to pay Donald $5,000. From an economic perspective, this deal is identical to one in which Donald sells Leona an option to buy the property for $95,000 within the next year and simultaneously loans her the present value of the $5,000 option purchase price. In purchasing the option, Leona has not expressed an intention to exercise it. Let us assume that she hasn’t made any definite-probability or warranting representations either. The whole point of the transaction is to allow Leona to induce a certain amount of reliance on Donald’s part (for example, he won’t sell the property to someone else) without entirely revealing Leona’s assessment of the probability that she will buy. And the point is that Donald might find it in his interest to sell Leona the option even without the assurance that Leona intends to exercise it. Contracts of this type are readily found in the real world and are generically

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referred to as “take or pay” or “alternative performance” contracts. Publishers routinely promise authors to either publish a book and pay X or not publish and pay x (where X is greater than x); oil companies promise landholders either to drill on their land and pay Y or not drill and pay y; and Twentieth Century– Fox famously promised Shirley MacLaine that it would either use her in the film Bloomer Girl and pay her 10 percent of the gross profits plus expenses or not use her and pay her only $750,000.18 The prevalence and durability of such contracting practices is by itself strong evidence that letting promisors retain the option to make up their minds later can create mutual gains of trade. Now Leona and Donald would have accomplished exactly the same result if Leona had made a legally recognized opaque promise rather than a positive one and they had specified the option price as liquidated damages for breach, rather than as an alternative (nonbreaching) performance. That is, Leona could instead have opaquely promised to purchase the land for $100,000 within the next year and specified damages of $5,000 in the case of nonperformance. Leona’s opaque promise, because it does not say that she intends to perform, protects her from liability for promissory misrepresentation (unless she affirmatively intends not to perform). And if Leona has not yet purchased at the end of a year, she will again have the option of either paying the $100,000 purchase price (now styled “performing,” rather than exercising her option) or paying the $5,000 (now styled “damages,” rather than a delayed option price). An opaque promise with a liquidated damages clause is therefore homologous to an option contract with delayed payment of the option price.19 And just as the option writer can find it in his interest to enter into the option contract, a promisee can find it in his interest to rely on a promise without assurance that the promisor intends to perform. As a general matter, people sell options without requiring more information about the option holder’s intent because their reliance costs are low or because the option holder pays for the ability to delay her decision. In either case, the option seller can live with a low probability that the purchaser won’t exercise the option. The same is true of opaque promises. A promisee will find it in his interest to rely, though he knows that the promisor might not intend to perform, where his participation constraint is so low that he is relatively indifferent to whether the promisor will perform. In such situations, it is possible that the promisee’s participation constraint is satisfied (Pp  Pp*), even though the promisor does not intend to perform (Pp  Pi ). The contract is mutually beneficial, even though the promisor does not intend to perform. There are three salient situations in which the promisee’s participation con-

The Representation Inquiry

straint is likely to be especially low. First, where the promisee anticipates full compensation for his reliance should the promisor breach, the probability of her performance will not make a difference in his decision whether or not to rely. Second, the promisee’s participation constraint will be very low where his expected profit from the promisor’s performance greatly outweighs his expected costs. Finally, the promisee’s participation constraint will be very low where the promisor is likely to signal her nonperformance before the promisee incurs significant costs. The typical case here is a contract with sequential performance where the promisee must perform only after the promisor has performed. But there are other situations in which the promisee can expect information about the promisor’s potential nonperformance prior to incurring significant costs.20 In any one of these circumstances both parties might stand to benefit from the transaction, even though the promisor does not intend to perform. We conclude that opaque promises are in their behavioral effects benign. Promisors might reasonably value retaining the option to decide later whether or not to perform. So long as the promisee is not misled as to the promisor’s intent, there is no problem with allowing such promissory behavior. Courts should not, therefore, require every promise to say that the promisor intends to perform. They should recognize opaque promises. But courts should worry about blank promises. So far as behavioral effects go, a blank promise differs from an opaque promise just in that it allows the promisor to enter into a contract with an affirmative intention not to perform. Such promissory behavior should be discouraged. It is possible to construct pathological examples of mutually beneficial contracts in which the promisor has an initial intent not to perform. Imagine, for example, that Wimpy promises to pay Popeye $5 next Tuesday for a hamburger today and that they stipulate that Wimpy’s damages will be $4 if he breaches. Even if, at the time of formation, Wimpy affirmatively intends not to perform, Popeye and Wimpy will both benefit (relative to no contract) if (1) Popeye’s hamburger cost is less than $4, (2) Wimpy’s hamburger benefit is greater than $4, and (3) Popeye can be relatively sure of collecting the liquidated damages when Wimpy breaches. But the fact that blank promises allow for contracts that are mutually beneficial relative to no contract does not mean that they are the most efficient way of realizing those gains of trade. In deciding whether to rely on Wimpy’s blank promise, Popeye does best by assuming that the probability of performance is zero. Popeye counts not on Wimpy’s performance but on the liquidated dam-

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ages he will get when Wimpy breaches. The parties have simply substituted liquidated damages for performance. That is, both are assuming that the promisor’s “performance” will be in the form of a damage payment. But then all of the social benefits of the pathological blank promise can be obtained by a positive promise in which the promisor affirmatively represents her intent to render the alternative to performance. In our cartoonish example, Wimpy could much more simply have positively promised to pay $4. Thus blank promises offer no gains of trade that cannot be obtained by substantively equivalent positive promises. But they do involve significant costs. First, a blank promise in which the promisor secretly intends not to perform runs the real risk of duping the promisee who doesn’t understand the meaning of the promise—who believes that the promise is opaque or even positive. Second, such agreements can be mutually beneficial only at the expense of the court system. Because informed parties are essentially bargaining for damages, their deal presupposes that the courts will be available to assess those damages—a cost that they are not required to internalize. Again, a comparison with option contracts is helpful. While the purchase of an option does not represent an intent to exercise it, it typically suggests that the purchaser does not intend not to do so. Suppose Leona acquires from Donald an option to purchase a piece of land suitable for a shopping mall not because she is thinking of building on the site but because she intends to build a mall two blocks away and wants to prevent Bruce, her competitor, from purchasing and developing Donald’s site. There is a strong intuition that in purchasing the option with an affirmative intent not to exercise it, Leona has committed promissory fraud. Donald has sold the option based on the assumption that Leona is at least considering purchasing the property, a fact that is reflected in the option price. Now we could allow Leona to opt out of the default representation that she is at least considering buying the property. That is, we could allow blank option contracts. But if Donald knows that Leona may well intend not to exercise the option, he will raise the option price so that he profits even if she doesn’t purchase. The parties are effectively contracting for Donald’s not selling the land during the option period. The cheaper course would be for Leona simply to contract with Donald not to sell to others. This type of contract exists in the real world and is often referred to as a “stand still” agreement. Courts should therefore adopt a mandatory interpretive rule that a promise represents at least that the promisor does not intend not to perform—that every contractual promise is at least opaque.21 This is not to say that a promise

The Representation Inquiry

cannot say more than what an opaque promise says. We should not prevent promisors from making positive, definite-probability, and warranting promises. But it is to say that a promise cannot say less, that it must say at least that the promisor does not intend not to perform. It’s worth stepping back for a moment to reflect on the sort of argument we have developed against blank promises. Throughout our analysis, we have emphasized that promissory representations of intent are material only because they provide promisees information about the probability of performance. The argument against blank promises, however, is not based on informational considerations. We suggest disallowing blank promises because we want to disincentivize certain sorts of nonsemantic behavior—intending not to perform one’s promise. It’s not necessary to go through the law of deceit to get this result. It might also be achieved simply by imposing punitive damages on promisors who intend not to perform. We would have no problem with such a rule. But we think that we can get the same result just as effectively by using the law of deceit. We can now return to the question of semiwarranting promises. Do our results with respect to the difference between blank and opaque promises have an analogue in the parallel distinction between nonwarranting and semiwarranting promises? Just as the law should stipulate that every promise says at least that the promisor does not intend not to perform, perhaps it should stipulate that every promise represents at least that the promisor does not believe that the contract is a bad deal for the promisee. That is, maybe we should also want a mandatory rule that every promise is at least semiwarranting. There is something to this suggestion, though we conclude that promisors should be allowed to opt out of even semiwarranting representations. The argument for a semiwarranting floor would be this. With respect to its effects on promisor behavior, a nonwarranting promise differs from a semiwarranting promise just in that the former allows the promisor to enter into the contract even though she believes that the chances of her performance are so slim that it is not in the promisee’s interest to rely. In other words, a nonwarranting promise allows a promisor to enter into a contract that she believes is not mutually beneficial. As with blank promises, it might be possible to construct pathological examples in which nonwarranting promises produce mutual gains of trade. But, as before, there are no social benefits to nonwarranting promises that could not be obtained in other ways. And the idea that a promisor might enter into an agreement secretly believing that it is a bad deal for the

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promisee offends our sense of good faith and fair dealing. Accordingly, both efficiency and fairness would be advanced by refusing to recognize nonwarranting promises, that is, by establishing a semiwarranting floor. As we have said, there is something to this argument. In fact, we shall rely on these sorts of considerations when we analyze what promisors should be required to do to make a nonwarranting promise. It is insufficient, however, as an argument for a semiwarranting floor. A promisor who prefers to make a blank promise because she intends not to perform cannot be mistaken about her intention. But a promisor who prefers to make a nonwarranting promise because she believes that it is not in the promisee’s interest to rely (that Pp  Pp*) might well be mistaken in that belief. While she is likely to have good information about the probability of her own performance (Pp ), she might well overestimate the promisee’s participation constraint (Pp*). Consequently, a promisor might believe that the deal is a bad one for the promisee, though in fact the transaction is mutually beneficial or value creating. A semiwarranting floor, which would deter such promisors, could well hurt promisees instead of protecting them. We want to avoid the perverse possibility of a promisor refusing to contract because she disagrees with the promisee’s own assessment that the contract is a good deal for him. If the promisee is adequately informed as to the probability of performance, his own judgment as to whether reliance is in his best interest is enough guarantee that the promise is to his benefit.22 That said, we might still want (and ultimately shall argue for) a rule that forces a promisor who believes that the contract is not in the promisee’s interest to share that information with the promisee—either by telling him so or by telling him just what the probability of her performance is. Such a rule both provides the promisee with the information he needs to determine whether it is in his interest to rely and answers our intuitions about the requirements of good faith and fair dealing. But we do not want a rule that would altogether deter such a promisor from the transaction. Our discussion of mandatory rules has brought us to a conclusion quite close to the libertarian position we described at the outset, though the analysis was not premised on the idea that the law should be structured to maximize parties’ freedom to contract. Courts should recognize and enforce information-rich representations. A fully warranting, definite-probability, or positive promissory representation should thus suffice as the basis for an action for promissory fraud. But courts should not require promisors to make such representations. They should allow nonwarranting and semiwarranting promises, non-definiteprobability promises, and opaque promises. The one exception is blank prom-

The Representation Inquiry

ises. Courts should interpret every promise as representing at least that the promisor does not intend not to perform.23 Interpretive Defaults

This is not yet to say how courts should decide what any given promisor has said about the probability of her performance—whether her promise was definite-probability or not, fully warranting, semiwarranting or nonwarranting, positive or opaque. The above argument concerns the range of the representation inquiry, what answers it can give to the question of what a promise said. But we have not yet described how interpretation should actually function, how courts should engage in the inquiry. There are two key interpretive questions. The first is the interpretive default: Absent evidence to the contrary, what should a court take a promise to represent? The second is the requirements for contracting around that default: What evidence should suffice to show that a promisor said more or less than the default? In this section we discuss the first question, in the next the second. Our proposal is that, absent evidence to the contrary, courts should interpret promises as positive and semiwarranting. That is, the default interpretation of A’s statement “I promise to x” should be that A says both that she intends to x and that she doesn’t believe that the probability of her xing is so low that it is not in the promisee’s rational self-interest to rely. In addition, the default meaning of A’s saying that she intends to x is that there is at least a 50 percent chance that she will x.24 There are various considerations to keep in mind when setting contractual defaults, including what the majority of parties would contract for, which defaults tend to have beneficial information-forcing results, the cost to opt out of different defaults, the cost both to parties and to society of failing to opt out of a default, and the costs of judicial gap filling.25 Our analysis focuses on the first two—what the majority of contracting parties would choose and informationforcing effects. Majoritarian defaults are desirable insofar as they decrease transaction costs by reducing the times parties contract around the default. They also tend to score high in terms of fidelity, since they are structured to capture what most people mean most of the time. Information-forcing defaults tend to penalize one or both parties, giving them an incentive to reveal information in order to opt out of the default. The desirability of an information-forcing default falls under the heading of informational effects and is governed by the general principle that interpretive rules should give parties an incentive to disclose the optimal amount of information. In the case of promissory representa-

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tions, we do not find that the other grounds that have been identified for preferring so-called “minoritarian” rules provide reasons for choosing one default over another. For the moment we are going to bracket definite-probability representations, which present a somewhat special case, and discuss just whether, absent evidence to the contrary, a promise should be interpreted as fully warranting, semiwarranting, or nonwarranting, or as positive or opaque. We begin with what might be gained by using penalty defaults—defaults that tend to force one or both parties to reveal information. The information at issue in promissory representations concerns the probability that the promisor will perform. Now if a promisor intends to perform or if she believes that the probability of her performance is so great that it is in the promisee’s interest to rely, she has a natural incentive to share that information, since doing so will increase the chances that he will choose to rely—the whole point of making the promise. Conversely, most promisors have a natural incentive to conceal the fact that they do not intend to perform or that they do not believe it is in the promisee’s best interest to rely. Consequently, if our only concern were to maximize information disclosure, the best interpretive default would be that a promise simpliciter is both positive and fully warranting. This default gives the promisor who does not intend to perform or who does not believe that she is so likely to perform that it is in the promisee’s interest to rely a new reason to put the promisee on notice of that fact by making an explicitly opaque, semiwarranting, or nonwarranting promise. While the more stringent default would have positive information-forcing results, it does not reflect what most promisors would choose to say with their promises. In most cases it is cheaper for a promisor to know her own intentions and beliefs than to determine the relation between the likelihood of her performance and the promisee’s participation constraint.26 As we’ve already discussed, to know the latter, the promisor must inform herself about, inter alia, the promisee’s costs of performance, his costs in case the promisor does not perform, and his benefit in case the promisor does perform. The expense of making a fully warranting representation includes both the costs to the promisor of gathering this information and the costs to the promisee of revealing it. Compare this to the costs of revealing an intent to perform or that the promisor does not believe, given her casually acquired information, that it is not in the promisee’s interest to rely on her performing. Because a promisor knows her intentions and beliefs by virtue of having them, positive and semiwarranting representations come with no information-gathering costs. It is cheaper for the

The Representation Inquiry

promisor to say that she intends to perform or that she doesn’t think that the deal is a bad one for the promisee than it is for her to say that it is in the promisee’s best interest to rely on her performing.27 Moreover, a reliable representation that the promisor intends to perform decreases the added value of saying that it is in the best interest of the promisee to rely. In most cases, knowing that the promisor intends to perform is enough to allow the promisee to determine for himself that it is in his best interest to rely. Thus a promisor’s relatively cheap representation that Pp  Pi will in most cases render her relatively expensive representation that Pp  Pp* pointless. And a semiwarranting representation has a similar, if less pronounced, effect. The upshot of these observations is that the maximally information-forcing default is more expensive in terms of information costs and is not the representation that most parties, if left to their own devices, would choose. While a positive, fully warranting default maximizes shared information, in most cases it will be more efficient for the promisor to make a positive semiwarranting promise. We believe that the prudent course in this situation is to opt for generally majoritarian, rather than information-forcing, defaults. Thus, absent evidence to the contrary, a promise should be interpreted as saying that the promisor intends to perform and that she does not believe that it is not in the promisee’s best interest to rely. While our proposed default can be characterized as majoritarian, it has information-forcing aspects. In particular, it gives the promisor who does not intend to perform a new reason to disclose that possibility to the promisee. Like the Hadley rule, our proposed default incentivizes idiosyncratic promisors to reveal their irregularity.28 Similarly, a promisor who thinks that the deal is a bad one for the promisee is given a new reason to reveal that possibility by clarifying that her promise is nonwarranting. Moreover, in most cases, this double representational default will produce enough information to enable optimal reliability, selection, and investment decisions. Because the information revealed by a positive or semiwarranting promise decreases the marginal value of a fully warranting representation, telling a promisee that the promisor intends to perform will usually be enough to allow him to determine for himself whether it is in his interest to rely. The promisee is further secure in his own estimation of his interests, since the promisor has represented that she is not withholding information that the deal is a bad one for him. To require more than our dual default would, in most cases, be overkill. Finally, the positive and semiwarranting default also scores higher in terms

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of fidelity, since it better conforms to our everyday language practice and thus to the probable understanding of the parties. Of course by adopting a given default, courts can change the expectations of legally sophisticated parties. But the law of deceit should be sensitive to the ordinary meanings of nonsophisticates as well, and default interpretations are a good place to locate this sensitivity.29 The legally untutored intuition is that to make a promise is to represent that one intends to perform it. Intuitions are perhaps less fixed on whether a promise simpliciter is fully warranting, semiwarranting, or nonwarranting. This is in part because this aspect of what a promise says depends so much on context. In personal agreements that involve a high degree of trust, the mere act of promising can fully warrant that it is in the promisee’s interest to rely, while in arm’s-length business transactions, a promise simpliciter says much less. But, as we argued in chapter 2, familiar contract doctrines like the implied warranty of fitness and unilateral mistake are evidence that even in an arm’s-length, dog-eat-dog world, it makes sense to think that a promisor would have a duty to inform the other party if she thought she was so likely not to perform that it was not in his interest to rely.30 An arm’s-length semiwarranting default is also consonant with the duty of good faith and fair dealing31 and with section 161 of the Second Restatement of Contracts, “When Non-Disclosure Is Equivalent to an Assertion”: “A person’s non-disclosure of a fact known to him is equivalent to an assertion that the fact does not exist . . . where he knows that disclosure of the fact would correct a mistake of the other party as to a basic assumption on which that party is making the contract and if non-disclosure of the fact amounts to a failure to act in good faith and in accordance with reasonable standards of fair dealing.”32 This duty to inform is all that a semiwarranting representation requires. Now, there is an important difference between the semiwarranting default and these familiar doctrines of contract law: proof that a semiwarranting representation was made fraudulently may allow the claimant to recover punitive damages. This difference in the potential consequences of violating the duty, however, does not change the fact that what the semiwarranting default requires of promisors is not so different from what is required by a variety of more familiar contract doctrines. We can reap the benefits of the semiwarranting default without doing serious damage to the expectations of parties in arm’slength transactions, that is, without compromising fidelity. With this argument for a basic default rule in hand, we now return to a question we bracketed at the beginning of this section, namely, whether the default interpretation of a promise should include any definite-probability representa-

The Representation Inquiry

tion. Perhaps instead of or in addition to the positive and semiwarranting representational defaults, the mere act of promising should be taken to represent that there is at least, say, a 50, or a 75, or a 90 percent chance of performance. To introduce a definite-probability default in addition to the positive default would be to rob the latter of much of its utility. The value of positive promissory representations lies in their flexibility and context sensitivity. Promises say very different things about the probability of performance depending on the thing promised, on the needs of the promisee, on the interests of the promisor, and so on. The positive default trades on the fact that the probability of realizing an intention often depends on context in the same way. By allowing that a promise simpliciter represents an intention to perform, our default captures an important difference between what a promise to do the dishes and what a promise to quit smoking says about the probability of performance. A default rule that both of these promises, absent evidence to the contrary, represent the same probability of performance would wipe out that difference. There is thus no sense to having both a positive and a definite-probability default. But what about a definite-probability default instead of the positive default? While the positive default might have an advantage in terms of flexibility, it comes at the cost of ease of interpretation. On the spectrum between standards and rules, positive promissory representations lie at the standards end and definite-probability promises at the rules end. Deciding what a promisor’s expressed intention to perform says about the probability of performance requires asking what sort of intention it is, whether the promisor has been generally successful in realizing such intentions in the past, what sort of external obstacles might keep her from realizing it in this case, and what the objectively reasonable understanding of the intention is in that context. The cheaper representation, both for courts and for parties, is the nonsubjective, definite-probability representation. Since any default has a certain stickiness, a definiteprobability default would result in more definite-probability promises and thereby reduce overall costs. Throughout our analysis we have adopted a strongly antiessentialist stance. Promissory practices are not written in stone. What a promise says is subject to change. Accordingly, we do not want to argue that a minimum-probability default is per se wrong. But the above argument does not convince us that it is the best approach. First, deciding whether a definite-probability representation was accurate often requires determining whether the promisor intended to perform, since this subjective fact is the most salient evidence of the objective probability of performance. Second, for reasons discussed above, a positive de-

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fault better reflects the understanding of the majority of contracting parties. Finally, we shouldn’t forget the flexibility and context sensitivity of positive promissory representations. Any given definite-probability default would also be antimajoritarian, since there is no single probability of performance that most promisors would choose to represent. The representation of an intention to perform, on the contrary, is one most promisors do choose. We therefore reject a simple definite-probability default. But we can still capture some of its advantages by adopting a default interpretation of what the representation of an intention to perform says about the probability of performance. We have argued that what an expressed intention to perform says about the probability of performance varies greatly depending on context and on the sort of act intended. The habitual opium smoker’s statement that she intends to quit suggests a lower probability that she will realize her intention than the dutiful roommate’s report that she intends to do the dishes. Nonetheless, it is useful for courts to have a default rule to use when evidence of context is unavailable—either because it doesn’t exist or because the parties have chosen not to introduce it. We recommend a default interpretation of a promisor’s representation that she intends to perform as meaning there is at least a 50 percent chance that she will do so. In the mathematical terms we have been using, absent evidence to the contrary, a court should assume that Pi = 0.5. We recognize that there might be information-forcing benefits to a higher default. The greater the promisor believes the probability of her performance to be, the more likely she is to reveal this information of her own accord. Setting a higher default value for Pi would therefore give more promisors an incentive to say explicitly just what they believe the probability of their performance to be. But setting a high default has its costs. For one thing, the higher the default value of Pi, the less it will reflect the natural understanding of most parties. For another, a higher default would make the fact finder’s task more difficult. A 50 percent default allows the court to pose the simple veracity question to the jury: Was it at the time of promising more likely than not that the defendant promisor would be unwilling or unable to perform? If the answer is yes, then her representation of an intention to perform misstated the probability of her performance.33 Finally, the default value of Pi does much less work than other interpretive defaults. It is usually obvious just how likely it is that the promisor will be able to realize an intention to do the sort of act promised, meaning that there is less need for a penalty default. We conclude that the default interpretation of a promise should be that it is positive and semiwarranting, and that, because the promisor intends to per-

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form, there is at least a 50 percent chance she will perform. Any element of this default can be defeated—by evidence that the parties have contracted around the default. Contracting around the Default

Just what evidence courts should consider when a party claims that the default did not pertain is the last step in our analysis of the representation inquiry. In answering this question, we emphasize considerations both of informational effects—opt out rules can require the parties to reveal information—and of fidelity. The answer also requires that we consider the potential unintended consequences of promissory-fraud liability, particularly its possible chilling effect on otherwise value-creating transactions. We oppose any one-size-fits-all rule specifying the necessary and sufficient conditions for opting over or under our recommended defaults. And as with the law of deceit in general, evidentiary rules governing what a given promise says must remain flexible. Fixed rules are occasion for abuse, providing safe harbors that protect real deceit from legal scrutiny—“it is part of the equity doctrine of fraud not to define it, lest the craft of men should find ways of committing fraud which might evade such a definition.”34 Nonetheless, there are a few especially salient types of evidence that a promisor said something other than the default. We divide them into three broad categories—express statements, context, and the parties’ motives or incentives to use a promise of one type or another—and consider each type in turn. Express statements. The case for allowing the parties expressly to agree to contract around the defaults is easiest for definite-probability representations. Absent local custom or prior agreement between the parties, if there are to be definite-probability promises, they must be express. Given our thesis that more information about the probability of performance is better, a promisor’s statement “There is an M-percent chance that I will perform” should suffice to create a definite-probability promise. Similarly, a promisee’s statement that he is assuming that the probability that the promisor will perform is at least M, coupled with the promisor’s failure to disabuse him of that notion.35 In the case of opaque promises, in which the parties opt out of the representation that the promisor intends to perform, contracting around the default can take the form of a promisor’s explicit disclaimer, such as: “In promising to x, I do not represent that I intend to x.”36 Option and take-or-pay contracts can also be viewed as expressly opting out of the positive default. As we have

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shown above, an opaque promise is homologous to an option contract. In addition, as we discuss in chapter 7, it should be enough if the promisor says that she considers herself to have the “option” of performing.37 Finally, a promisor who makes a definite-probability representation of a lower probability than the likelihood of her realizing her intention to perform (M  Pi ) should be understood to have opted out of the positive default. Fully warranting representations, in which the parties opt over the semiwarranting default, can be completely transparent, such as “I am so likely to perform, you can safely rely on it.” They can also be found in such assurances as: “Trust me, this is a good deal for you,” “You can count on me,” and “I have your best interests at heart here.” An unambiguous statement by the promisee that he understands the promisor to be warranting the probability of her performance should also be enough to create a fully warranting promise. We propose somewhat more stringent rules for opting under the semiwarranting default. The statement “It is my belief that you do not stand to profit from this deal” clearly suffices. So too should an express definite-probability representation, since by telling the promisee just what she believes the probability of her performing to be, a promisor enables the promisee to judge for himself. Parallel statements by a promisee (“You might believe I won’t profit from this deal, but I want to enter into it in any case”) should also be enough, as should more ambiguous statements like “Don’t worry about me,” “I can take care of myself,” and “Every man for himself.” We would not, however, allow a promisor to opt under the semiwarranting default by simply saying that she makes no representation as to whether she thinks it is in the promisee’s interest to rely. In this case, we want to require promisors to reveal information, not simply say what they are not saying. We would therefore treat opting under the semiwarranting default differently from opting under the positive default. While a promisor can opt under the positive default by making an information-poor, opaque promise—which doesn’t tell the promisee just what her intention is—a promisor can opt under the semiwarranting default only by making an information-rich warning representation, in which she tells the promisee just what she thinks about the probability of her performance. The reason for this difference in treatment is a concern we raised in the discussion of mandatory rules: by recognizing nonwarranting promises we allow promisors to enter into deals they believe may not be in the promisee’s interest. This is a problem from an economic standpoint, since if the promisor is correct, then the transaction might not be value creating. And it is a problem for

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nonconsequentialist reasons, since such behavior violates our sense of fair dealing. Requiring promisors who want to opt under the semiwarranting default to do so in one of the explicit and informationally rich ways we’ve identified answers both concerns. When a promisor tells the promisee that she doesn’t think it is in his interest to rely, she puts him on notice that she has information that the deal is not in his best interest. When a promisor makes an express definiteprobability representation, she gives the promisee the information he needs to decide for himself. We can then leave it up to the promisee to determine whether to rely anyway, to make further investigations, or to terminate negotiations. We might have chosen a similar information-forcing opt-out rule with respect to representations about the promisor’s intention. One could imagine allowing a promisor to opt under the positive default only by communicating just what her intention actually is—by making a conditional promise, by proposing an option or take-or-pay contract, or by simply saying just what she intends. But information-rich representations about a promisor’s intentions come with costs. For one thing, they can weaken the promisor’s negotiating position, possibly preventing otherwise value-creating deals.38 For another, they expose her to continuing liability for promissory fraud, as a representation of even a conditional or disjunctive intention can be false. Finally, opaque promises don’t pose the risk that nonwarranting promises do. Because we have established an opaque representational floor—refusing to recognize blank promises—we’ve already acted to deter promisors who intend not to perform. A promisor’s conditional or disjunctive intention with respect to performance simply doesn’t pose as serious a threat as her belief that it’s not in the promisee’s interest to rely. So long as the promisee knows what he doesn’t know—so long as he is aware that the promisor is not representing that she intends to perform—we are satisfied with a rule of caveat promisee. In using the parties’ express statements as evidence that they opted out of a default representation, courts should be sensitive to whether the speaker’s liability interests are advanced or frustrated by his or her statement. In particular, they should follow the rule of interpreting ambiguous contractual language against the drafter.39 Thus, if opting out of the default either decreases the speaker’s own liability or increases the liability of the other party, the court should require that his or her express attempt to contract around the default be objectively unambiguous. Conversely, courts should be more lenient when considering statements against the speaker’s liability interest and allow ambiguous statements to be sufficient to opt out of the default. As an example, recall

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the facts in Ex parte Lumpkin. When the plaintiffs balked at signing a lease that did not include the adjacent property, the defendants promised to acquire it, saying, “The owner was good for his word” and “Don’t worry about it, because we’ll have the property by the end of the week.”40 While these statements are perhaps ambiguous, it is highly relevant that they were uttered in order to convince the plaintiffs to rely. According to our proposed interpretive rule, they should be read against the defendants’ interest as fully warranting representations, defeating the semiwarranting default and making the defendants liable for promissory fraud. This provides the proper incentives to promisors to say clearly what they mean, making the fact finder’s task easier, and protects the promisee who relies on his reasonable interpretations of what the promisor said. Context. It has been central to our criticism of the categorical interpretation that, even absent words to that effect, some promises don’t say that the promisor intends to perform and other promises do say that the promisee can reasonably rely on performance. In some cases, the context of promising alone suffices to defeat a representational default. Relevant context includes a variety of factors, the most important of which are the relationship between the parties, industry practice, and contractual terms. Our discussion of these factors is not meant to be exhaustive, since promissory practices vary both over time and across cultures and subcultures, but will indicate how context should figure into the representation inquiry. We have argued that, based on information-forcing considerations, courts should not consider context when a promisor argues that her promise was nonwarranting. In order to make a nonwarranting promise, a promisor should be required either to say that she doesn’t think it is in the promisee’s interest to rely or to say just what the probability of performance is. This leaves opaque and fully warranting promises as the two nondefault representations to consider. A promise can be found to be fully warranting based on the fact that there is a special relationship of trust between the promisor and promisee, especially where this relationship is unbalanced. Recall our example of a smoker’s promise to quit, made to her vehemently antismoking fiancé. Part of the reason we view this promise as fully warranting is that, because they are engaged, each party has the right to assume that the other has his or her best interest at heart. The fiancé should assume that his betrothed would not ask him to rely on her quitting unless she thought it in his best interest, unless she believed that Pp  Pp*. This is all the more so when the relationship of trust is unbalanced—where

The Representation Inquiry

the promisee relies more on the promisor than she does on him. Consider a grown daughter’s promise to her ailing father that, in exchange for title to his house, she will take care of him for the rest of his days. If it can be shown that the father generally relies on his daughter’s judgments as to his best interest, then this should be read as a warranting promise. The father is justified in assuming that his daughter’s promise represents not only that she intends to take care of him but also that he can safely rely on her doing so.41 Such trust relationships will often be extremely persuasive in establishing that a promise was fully warranting.42 The assumption in an arm’s-length transaction, on the other hand, should be that a promise is only semiwarranting. Where the parties do not stand in a special relationship of trust, the default should remain that the act of promising does not say that the promisor is so likely to perform that the promisee can safely rely. Background norms and practices can also be relevant to defeating the positive default. Thus specific types of contract, contracts within certain industries, and even contracts that occur within a given extended business relationship, can be governed by nonstandard interpretive norms that suffice to defeat the interpretive defaults we’ve recommended.43 Consider the refundable tuition deposit many universities require. If we view a tuition deposit as an acceptance of the admission offer, then the student’s promise to attend is an opaque promise.44 The student who sends in a deposit to her backup university before she has heard from her first choice is not guilty of promissory fraud, since everyone understands that making a tuition deposit does not express an intention to attend. Similarly, it is not unusual to make a hotel or car reservation based on the mere possibility one will rent the car or stay at the hotel. Mail-order businesses now commonly include a label for returning items, expressing an expectation that many customers purchase only to try goods out. And Stuart MacCaulay’s seminal study of business arrangements revealed that businesses considered many contracts to be merely “orders” that provided promisors with more performance flexibility.45 Alternatively, well-established local interpretive norms might establish that a promise was fully warranting, as opposed to merely semiwarranting. Also under the heading of relevant context are the terms of the contract itself. Both liquidated damages clauses and specific-performance stipulations can be probative, though what either says depends on how it ended up in the contract. Thus a promisee’s insistence on either remedy might indicate that he sought to insure against the risk of nonperformance because he was unsure as to

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whether the promisor was going to perform, which is consonant with an information-poor (opaque or nonwarranting) promise. A promisor’s insertion of a specific performance clause, on the other hand, might suggest that her promise was fully warranting rather than semiwarranting, or that it was positive rather than opaque. By exposing herself to higher penalties (contempt of court), her offer of specific performance can communicate that the promisor expects that she will perform.46 A converse problem to the in terrorem concern with supracompensatory damages arises where a promisor inserts a subcompensatory liquidated amount that provides her a cheap way out of performance.47 Of course, a nonrefundable deposit, no matter whose idea, can suggest that both parties understood that nonperformance was a real possibility. But this is only true if the damage clause was sufficiently salient to and protective of the consenting promisee. If not, a subcompensatory damage clause might instead be evidence that the promisor planned nonperformance. We do not want to limit parties’ ability to agree to smaller cash amounts. But the whiff of promissory fraud can be avoided more directly by putting the cards on the table and explicitly framing the deal as an alternative performance contract. Motive. A third and final category of interpretive evidence is the promisor’s incentive, or motive, to make one sort of promissory representation or another. Motive is never sufficient to determine what a promise said. And sometimes it is unnecessary—as where a written document explicitly and uncontestedly opts out of a default. But motive can be highly probative in borderline cases.48 Whether a promisor has a reason to make one or another promissory representation depends on her evaluation of what assurances she must give the promisee in order to convince him to rely. This will depend on her evaluation, first, of the promisee’s participation constraint and, second, what other sources of information he has regarding the probability of performance. The higher the promisee’s participation constraint, the more reason a promisor has to make a fully warranting, positive, or high-probability representation. A claimant who alleges that the promisor made a high-assurance representation should attempt to show that his participation constraint was particularly high and that the promisor was aware of this fact. Conversely, a defendant who wants to show that her promise was not fully warranting, highprobability, or positive will do well to show that she thought the promisee had a low participation constraint and thus had no reason to incur the costs of making a high-assurance representation.

The Representation Inquiry

We have already discussed the various reasons why a promisee can have a low participation constraint, which include fully compensatory damages and favorable profit ratios.49 A particularly tricky situation is sequential performance. When the promisee is scheduled to perform first, he will tend to demand greater assurance than in those cases where he performs second, since in the latter case he is likely to have notice of her potential breach before incurring the costs of his own performance. But care must be taken when weighing the probative value of sequential performance. Even in a contract under which the promisor is to perform first, the promisee can incur significant costs by ceasing to look for other contracting partners. Consider, for example, Carly’s promise to Warren to mow his lawn before Saturday, the day on which he is to host the National Lawn Dart Championship. Even if Warren is not required to pay until after Carly mows, he incurs significant costs when he stops looking for other people to do the job. Among other things, Warren’s reliance gives Carly the opportunity to wait until the last minute, threaten to breach, and renegotiate a higher price. If a promisee’s reliance puts him in a situation in which he can be threatened with renegotiation under duress, then he has incurred significant costs prior to the promisor’s performance, even if he has not yet performed. Warren’s participation constraint is quite high, and it is unlikely that Carly could convince him to enter into the contract unless she represented that she intended to perform, that Warren could safely rely on her performing, or that she was 99 percent certain to perform. In addition to the promisee’s participation constraint, a promisor’s motive to make one promissory representation or another depends on what other sources of information about the probability of performance she thinks the promisee has and what she thinks those sources tell him. As we noted in our discussion of information-poor promises, these sources can include other promissory representations, information about whether it is in the promisor’s self-interest to perform, and empirical data of the promisor’s past performance rate. A promisor who believes that the information a promisee has isn’t enough to assure him that he should rely has a reason to make a high-assurance representation. But if she believes that the promisee already thinks it is in his interest to rely, then she doesn’t have a reason to incur the costs of a positive, fully warranting, or highprobability representation. In addition to indicating whether or not the promisor made a high-assurance representation, this sort of evidence is probative as to whether the promisee understood her to have done so. If it wasn’t in the promisee’s interest to rely without a high-assurance representation, the fact that he did rely suggests that

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he understood the promisor to have made such a representation. Conversely, if the promisee had reason to rely even without an assuring representation, it is all the more likely that he did not understand one to have been made.50 Now motive evidence alone should never suffice to defeat the positive and semiwarranting defaults. But in some cases motive evidence can suffice to tip the scales one way or another. A promisee’s ambiguous statement that he is relying on the promisor’s good will might not suffice on its own to establish that the promise was a fully warranting one. But if he can also show that he would not have relied on the promise based solely on a positive representation and that the promisor was aware of this fact, then he has a much stronger case. And when the norms in a given industry are ambiguous as to what promises say, a party who can show that it was in the promisor’s interest to make a representation of one sort or another has a much stronger case. In these and other such situations, motive evidence is highly relevant.

Chapter 6 The Veracity and

Scienter Inquiries: Evidence of Falsity and Evidence of Culpability

Having decided what a promise said, it is next necessary to determine whether it was false and, if so, whether the promisor acted culpably. The first is the veracity question, the second the scienter question. We described the difference between these two inquiries in chapter 3. In this chapter, we explore what sorts of evidence courts should consider when answering each inquiry. The potential chilling effect of promissory fraud, both on contract formation and on efficient breach, might seem to speak for a high evidentiary bar. Courts in a number of jurisdictions have imposed especially heavy evidentiary burdens on claimants alleging promissory fraud. Illinois imposes a scheme-or-device requirement: “In order to survive the pleading stage, a claimant must be able to point to specific, objective manifestations of fraudulent intent—a scheme or device. . . . If the rule were otherwise, anyone with a breach of contract claim could open the door to tort damages by alleging that the promises broken were never intended to be performed.”1 In Michigan, we find courts holding that “the evidence of fraudulent intent must relate to conduct by the actor at the time the representations are made or al113

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most immediately thereafter.”2 And Tennessee courts have required “direct proof of a misrepresentation of actual present intention.”3 But it is not obvious that an especially high evidentiary bar is desirable.4 The facts a claimant must prove to establish promissory fraud are somewhat elusive. Under the traditional approach, he must prove that the promisor did not initially intend to perform. Under our proposal, he might instead prove a low initial probability of performance. And if he claims promissory fraud, he must also prove scienter—that the promisor made the misrepresentation knowingly or with reckless disregard of its truth. None of these facts is susceptible to easy proof. Most claimants’ only evidence of initial intent will be circumstantial— behavior of the promisor that indicates her intentions at the time of promising. Proof that the probability of performance was lower than represented is equally difficult, requiring evidence that circumstances at the time of promising indicated that the promisor was likely not to perform. And showing scienter demands evidence of what information was available to the promisor, how she should have understood that information, and how she actually did understand it. Finally, all of this is in addition to proof of the other elements of deceit—an intention to induce reliance, justifiable reliance by the promisee, and proximately caused damages. Rather than raising the evidentiary bar in civil cases, courts can and should act to prevent potential chilling effects by diligently overseeing actions for promissory fraud. First, the heightened pleading requirements for claims of fraud, like those found in Rule 9(b) of the Federal Rules of Civil Procedure, should apply to allegations of promissory fraud.5 Such allegations ought to be pled with particularity, and courts should be quick to dismiss complaints that don’t meet that standard. We would even be comfortable imposing a rule similar to that in the Private Securities Litigation Reform Act, which requires a complaint to “state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind.”6 Second, courts should carefully distinguish and define the separate elements of promissory fraud. The differences, for instance, between promisors who do not intend to perform, who intend not to perform, and who knowingly misrepresent their intention to perform are subtle and often overlooked—certainly by judges and probably by juries. Judges should be clear about the exact meaning of different elements and communicate that meaning to the jury. Finally, courts should insist that claimants adduce sufficient evidence of each element of promissory fraud, and judges should themselves weigh the sufficiency of the evidence. Because the distinctions in the law of promissory fraud

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are relatively subtle, there is a danger that juries will be misled by irrelevant or inconsequential evidence. Judges should be prepared to grant summary judgment to the defendant when the evidence is insufficient. So long as there is regular court policing of the pleading and the elements and evidence of promissory fraud, the threat of punitive damages will not chill good contracting behavior. It is therefore unnecessary to raise the evidentiary bar higher than it already is. And raising the bar would prevent meritorious claims from receiving relief. A claimant who has been duped by the promisor often can prove promissory fraud only by introducing circumstantial evidence of the promisor’s intentions, of the probability of her performance, and of her knowledge or recklessness. The evidentiary bar in promissory fraud cases is intrinsically difficult to clear; raising it threatens to render the cause of action irrelevant. While courts should allow circumstantial evidence of promissory fraud in civil cases, we argue in chapter 8 that the bar should be higher in prosecutions for false promise. A model is New York’s larceny by false promise statute, which requires evidence “excluding to a moral certainty every hypothesis except defendant’s intention or belief that the promise would not be performed.”7 In interpreting this provision, New York courts have explained that “[i]t is because of the danger of confusing larceny by false promise with purely civil wrongs that the Legislature has insisted that the People prove to a moral certainty that at the time of the promise the defendant had no intention that it would be performed.”8 The rest of this chapter discusses the different types of evidence a claimant can introduce to satisfy the veracity and scienter inquiries. We argued in chapter 3 that courts need to distinguish between the veracity and scienter questions. Most important, they need to avoid the common mistake of thinking that an answer to the former automatically answers the latter, that a misrepresentation of intent is perforce an intentional misrepresentation. But there is often in promissory-fraud cases a close relationship between evidence of misrepresentation and evidence of culpability. Because people know their own minds, proof of an intent not to perform (falsity) often strongly suggests that a misrepresentation was made knowingly (culpability). Contrawise, proof of an intent to deceive (culpability) can serve also as proof of an intent not to perform (falsity). This is our reason for discussing the veracity and scienter questions together. There is a sexist adage that it is a woman’s prerogative to change her mind. But we should be skeptical of a promisor who claims to have changed her mind

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but cannot explain why. Thus in very many cases initial intent can be proven by showing that nothing happened between the time of promising and the time of breach that might have caused the promisor to change her mind about performing. Such evidence can include a short time between promise and breach, no changed circumstances, repeated assurances leading up to breach, and no attempt to perform. Other evidence that the promisor didn’t change her mind but never intended to perform includes patterns of behavior suggesting a plan to breach, repeated similar instances of nonperformance, and the promisor’s knowledge at the time of promising that she would be unable to perform. We consider our role in this chapter as something like that of the Victorian zoologist. We examine the cases, collect, classify, and catalogue the various species of evidence, note physiological similarities and genealogical links between them, and describe the uses and dangers of each. The result, we hope, is a sort of Field Guide to the proof of promissory fraud, which will be of as much use to practitioners as to theorists.9 (We warn the former, however, that we often cite cases not for their holding but for their interesting fact patterns. One of the reasons for writing this chapter is that courts tend to overlook evidence that we regard as highly relevant. Thus caveat citator.) We organize our taxonomy using the well-established distinctions between direct evidence, circumstantial evidence, and, as a subcategory of the latter, motive evidence.

DIRECT EVIDENCE

“Direct evidence,” or “original evidence,” is evidence based on personal knowledge or observation.10 The only source of direct evidence as to the defendantpromisor’s intentions, knowledge, or beliefs is the defendant-promisor herself, for only she has “direct” access to these subjective facts about herself.11 A defendant-promisor’s intentions are at issue if the claimant argues that her positive promise was false because she did not intend to perform or that her opaque promise was false because she intended not to perform. Her beliefs will be at issue if the claimant argues that her semiwarranting promise was false because she believed that she was so likely to breach that it was not in his interest to rely. Her knowledge will be at issue if the claimant argues that she knowingly made the promissory misrepresentation. A claimant who wants to prove any of these might introduce evidence of the defendant’s statement about her intentions, knowledge, or beliefs. This evidence can be in the form of the defendant’s own testimony or a witness’s report of her out-of-court statement.12 Such evidence is uncommon, but it does occasionally surface. It is especially

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likely where the defendant-promisor is a corporate entity or is represented by an agent. In these situations, one hand may not know what the other hand is doing. Thus in the seminal case of Edgington v. Fitzmaurice, the primary evidence that the defendant intended to use money raised by the sale of bonds for purposes other than what it told investors was the minutes of the Board of Directors’ meetings.13 Similarly, in Wharf (Holdings) Ltd. v. United International Holdings, Inc., the U.S. Supreme Court found sufficient evidence that the defendant-promisor did not intend to honor its promise to sell securities in the fact that “internal . . . documents suggested that Wharf had never intended to carry out its promise.”14 And in Beneficial Personnel Services v. Rey, an employer’s promise to provide employees the same benefits as under the Texas Worker’s Compensation Act was belied by an internal directive stating that employees were not to be allowed to choose their own doctors—a restriction that the Worker’s Compensation Act would have disallowed.15 Direct evidence can occasionally be had from individual defendants as well. In Fidelity-Philadelphia Trust v. Simpson, the defendant and his agent left a paper trail of more than a hundred letters that the court found to show “falsehood, cunning and deceit seldom equaled in human transactions.”16 Less dramatically, in In re Marriage of Fricke, the court found that the claimant’s testimony that the defendant had told her that he had never intended to perform, along with the fact that the defendant had made no pretense of performing, was enough to send the case to the jury.17 And we can imagine similar direct evidence that a defendant’s misrepresentations were knowing or that she believed that it was not in the promisee’s interest to rely. While a defendant’s out-of-court reports of her intentions, beliefs, or knowledge can be very probative, her in-court statements of the same should be handled with care. Recall our hypothetical contractor from chapter 3, who mistakenly believed her promise to install a swimming pool did not commit her to installing the filtration system. It is not uncommon for a defendant arguing for an alternative interpretation of her promise to testify that she intended to perform something other than the alleged promise.18 If the court then finds against her as to the objective meaning of her promise, her testimony can show that at the time of promising she did not intend to perform.19 But such testimony is problematic. In most cases, it shows at most that the defendant was mistaken as to what her promise meant.20 Unless the defendant’s proffered interpretation is so outlandish as to be reckless on its face, her testimony does not alone show that the resulting misrepresentation was fraudulent.21 And by allowing such in-court statements to serve as evidence of promissory misrepre-

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sentation, the court puts the defendant who genuinely believes she has not made the alleged promise in a bind: she must either admit to a promise she did not make or testify to a different understanding and thereby risk liability for promissory fraud. Courts confronted with such evidence should at a minimum require proof that the promisor was reckless in misinterpreting the scope of her promissory representation. So far, we have been considering direct evidence of subjective facts about the defendant. Where the question to be decided concerns not the subjective state of the defendant but the objective probability of performance, the promisee’s participation constraint, or whether or not the promisor acted recklessly, there is little or no place for direct testimony. None of these sorts of facts is amenable to direct observation. Knowledge of them requires an act of judgment based on the totality of the relevant circumstances.

CIRCUMSTANTIAL EVIDENCE

In the vast majority of cases, the veracity and scienter inquires turn on circumstantial evidence. This is not a shortcoming or something to be lamented but follows from the type of fact a claimant-promisee needs to prove. If the defendant has not reported her lack of intent to perform, that she believed it was not in the promisee’s interest to rely, or that she knew she was misrepresenting the probability of her performance, then these subjective facts must be inferred from her behavior and other circumstantial evidence. And because objective facts like the probability of the promisor’s performance, the promisee’s participation constraint, and the defendant’s potential recklessness inherently involve judgments about the meaning of the relevant facts, these elements are subject only to circumstantial evidence. In chapter 3 we drew a map of the various forms that the veracity and the scienter inquiry can take, depending on what sort of promissory representation was made and on the type of culpability alleged. (See table 2, which appears at the end of that chapter.) It would be tedious to disaggregate every possible type of evidence relevant to each separate representational region. We focus instead on the three most common and salient issues: the defendant-promisor’s initial intent with respect to performance, the objective probability of her performance, and whether or not she made her misrepresentation knowingly. The first two are questions of veracity, the third a matter of scienter. Our earlier analytic chapters have shown that allegations of promissory insincerity can raise other factual questions as well—like whether the objective probability of per-

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formance satisfied the promisee’s participation constraint (relevant to a warranting representation), whether the promisor believed that it was not in the promisee’s best interest to rely (relevant to the semiwarranting default), and whether the promisor made the misrepresentation recklessly (another form of culpability). We leave the analysis of these evidentiary questions for another day. While courts should distinguish among the questions of promisor initial intent, the objective probability of performance, and scienter, there is also considerable overlap in the relevant evidence. Thus facts tending to show the promisor’s initial intent are often probative of the objective probability of performance and whether she meant to deceive the promisee. Evidence of a plan to deceive the promisee can show that the promisor never intended to perform. And conditions known to the promisor that show a low probability of performance can indicate that she didn’t intend to perform. We discuss proof of these different questions separately, but also note the connections among them. Circumstantial Evidence of the Promisor’s Intent with Respect to Performance

We have argued for a mandatory interpretive rule that every nonpositive promise is at least opaque. As a result, no matter what the promissory representation, a claimant can satisfy the veracity inquiry by showing that the promisor had an affirmative intention not to perform. If the promisor made a positive promise, which we recommend as an interpretive default, then the claimant need only show that she did not intend to perform—that she had, for instance, a conditional intention or an intention to do something other than what the contract required. The same types of evidence are relevant to either showing. The difference between proving no intent to perform and an intent not to perform is a matter of degree, not kind.22 The question of the promisor’s initial intent is closely tied to the question of whether her breach was the result of a change of heart. More precisely, they are two sides of the same coin. If the promisor originally intended to perform and then failed to do so, at some time after she made the promise she must have changed her mind. If the promisor never intended to perform, we don’t need an intervening decision to explain her nonperformance. In thinking about how initial intent can be established, the question of whether the promisor changed her mind provides a powerful heuristic. We determine what happened at the time of promising by looking at the entire history of the promissory relationship and beyond.

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We begin with the fact that the promisor broke her promise.23 Standing alone, nonperformance is never enough to prove the promisor’s initial intent.24 Her nonperformance might have been the result of a postpromise change of heart. It does not follow, however, that breach is of no probative value.25 A person’s actions are evidence of her intentions. And while Wimpy’s failure to pay for a hamburger on Tuesday is most probative as to his intention on Tuesday, it at least casts doubt on whether he really intended to pay the previous Friday, when he made his promise. The rule has been properly stated as follows: “While the failure to perform, standing alone, will not establish the issue of fraudulent intent at the time of the making of the promise, it is, nevertheless, a circumstance to be considered with other facts in determining the issue.”26 In assessing whether nonperformance was the result of the promisor’s initial intent or of a change of heart, one can also ask whether there were any changed circumstances that might account for a postpromise decision not to perform. As Shakespeare’s Katherine explains of Henry VIII, “His promises were, as he then was, mighty; / But his performance, as he is now, nothing.”27 The cases provide an abundance of examples of how changed circumstances, or the lack thereof, can be relevant. In Kepler v. WHW Management, Inc.,28 for instance, an appellate court reversed the trial court’s summary judgment for the defendantpromisor based in part on the fact that the defendant, who had hired the claimant as a real-estate broker, had no explanation for not having sold to the willing buyers the claimant found. In fact, the court emphasized, the defendant “agreed to sell one of the properties to his son on terms which were similar or equivalent to the terms which had been acceptable to a prospective buyer” procured by the claimant.29 Conversely, changed circumstances that account for why the defendant might have changed her mind can controvert a claim that she originally did not intend to perform or intended not to perform. Thus, in Wade v. Chase Manhattan Mortgage Corp., the court granted the defendant’s motion for summary judgment, finding that changes in corporate leadership explained why the defendant corporation decided to close a branch bank office four months after hiring the claimant as its manager.30 In Darby v. Johnson, the court found that the discovery of oil on the property and the fact that the defendant had married and established residence on it better explained his breach of a promise to reconvey the land than did an initial bad intent.31 Where a defendant claims changed circumstances, she must also establish that she did not foresee those circumstances when she promised, since she otherwise should have either refrained from promising or disclosed her potential nonperformance by making a conditional or an opaque promise. In Craig v.

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Forest Institute of Professional Psychology, the defendant, a professional psychology school, closed a local campus before many students had graduated, breaching its promise to keep the campus open.32 The school argued that it was forced to close the campus “because of serious and unforeseen financial problems.”33 But the state licensure board had already put the school on probation when the school made its promise. The court found that the school should have known that its appeal of that decision might not succeed and concluded that, rather than serving as an excuse, the foreseeability of the closure suggested that there was a genuine issue of material fact as to whether the school initially intended to perform. We shall discuss the evidentiary value of a defendant’s knowledge of her inability to perform in more detail below. Another form of evidence as to whether the promisor changed her mind is the length of time between promise and breach. As Holmes wrote in his dissent to Bailey v. Alabama, “Is it not evidence that a man had a fraudulent intent if he receives an advance upon a contract over night and leaves in the morning?”34 Of course a short time between promise and breach is not dispositive. As Allan Farnsworth discusses, a promisor might immediately regret her promise and change her mind about performing where her decision was unfairly influenced, uninformed, or ill considered.35 But the shorter the period between promise and nonperformance, the less time there is both for changed circumstances and for a change of mind. We find many cases in which courts recognize the evidentiary value of the length of time between promise and nonperformance. Thus in United Companies Financial Corp. v. Brown, a contractor cashed the claimant’s check immediately upon receiving it, despite his promise to hold the check until work was finished.36 The court affirmed a jury finding of promissory fraud, reasoning that “the sequence of events is so clearly one transaction as to establish intent not to honor the promise at the time it was made.”37 Courts have also recognized that the longer the time between promise and breach, the less probative breach is as to the promisor’s initial intent.38 In Pegram v. Hebding, the appellate court correctly affirmed a directed verdict rejecting a promissory-fraud claim where more than five years had elapsed between the defendant’s promise that the claimant would have an equal position in a company he cofounded and the claimant’s transfer to a lower position.39 Similarly, in Purcell Co. v. Spriggs Enterprises, Inc., which overturned a jury finding of promissory fraud, the court properly emphasized the four-year lapse between the defendant’s promise not to sell neighboring parcels to the claimant’s competitors and its breach of that promise.40 In thinking about the time between promise and

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breach, the relevant period is between the last promissory act and the earliest indication of a decision to breach. Thus repeated postpromise assurances of performance shorten the time period, as does prebreach promisor behavior that indicates that the promisor has already decided not to perform.41 Along the same lines is evidence of whether or not the promisor took any steps toward performance. The evidentiary value of no performance at all can be seen at work in the holding of In re Marriage of Fricke.42 The defendant, a funeral-home director, had promised as part of a divorce settlement to refer business to his ex-wife, who ran a monument business, but over the course of five months never sent his ex-wife a single customer. The court found that an “intention not to perform ‘may be inferred from the fact that after performance by the promisee the promisor [did] not even make a pretense of carrying out his promise or [evaded] and [refused] to perform it.’”43 On the other hand, a defendant’s partial performance is one of the best defenses to a claim of promissory fraud. In Southeastern Properties, Inc. v. Lee, an appellate court reversed a jury finding of promissory fraud where a developer failed to make promised improvements in a residential development.44 The court emphasized that the developer had invested $12,000 and significant work in making the improvements and found that “evidence that a party actually attempted to perform or ‘make good’ his promise may, in circumstances where there is no indication that the performance was in bad faith or a sham or the result of demands by the complaining party or in other appropriate instances, defeat an allegation that when the party made the promise he did so without any intention of keeping it.”45 Similarly, in Morgan v. Inter-Continental Trading, which considered a franchisee’s claim of promissory fraud against a parent typewriter company that had canceled the franchise agreement, the court ruled for the defendant on the grounds that early in the relationship it had extended the claimants significant assistance—“not the actions of a person set upon a course of fraud and deceit.”46 Also relevant to the promisor’s initial intent, of course, are conditions at or around the time of promising. Thus, for instance, if the promisor knew at the time of promising that she was unlikely to be able to perform, this is strong evidence that she did not intend to perform or intended not to perform and that her breach was not the result of a later change of heart. Consider the actions of Julie Andrews’s character in the film Victor/Victoria. Early in the movie she goes into a restaurant and orders a full meal, though she doesn’t have a sou to her name and knows she will be unable to pay. Clearly she doesn’t intend to perform her implicit promise to pay for the meal. There is a difference between in-

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tending to do something and wishing one could do it: one can intend only that which one believes one can accomplish.47 The most widely discussed example of this sort of evidence is a buyer’s inability to pay at the time of sale. As a Missouri court put it in 1896, “A knowledge on the part of the vendee, at the time of purchase, that he will not be able to pay for the goods, is the same thing as an intent then existing not to pay for them.”48 But there are numerous other sorts of evidence. In Williams v. Williams, an appeals court upheld the jury’s finding of promissory fraud based on the fact that when the defendant offered the claimant a two-year coaching job, he knew the position was only for one year and that he lacked authority to make the offer.49 In Glendale Federal Savings and Loan v. Marina View Heights Development, the appeals court found that the trial court’s determination that a developer “believed it would be impracticable to complete the work within [the promised] 18 months” was evidence that it did not intend to complete it within that period.50 A promisor’s knowledge of her inability to perform can also be supported by previous similar instances of nonperformance. Thus, in Mason & Dixon Lines v. Byrd, the appeals court affirmed a jury finding of no intention to perform a promise to provide the claimant delivery equipment where the defendant’s failure to dispatch equipment “was a recurring problem, well known to Mason and Dixon and to independent trucking agents in the area.”51 Our present concern is just evidence of the promisor’s intentions. Thus circumstances making performance unlikely are relevant only to the extent that the promisor knew of them when she made her promise. If the defendant was unaware of the relevant facts, then they say nothing about her intentions.52 In fact, where the defendant didn’t know of the unfavorable circumstances they are more like unforeseen changed circumstances and, as we discussed above, suggest that nonperformance was the result not of the promisor’s initial intent but of a postpromise change of heart. Nor is a defendant’s knowledge of unfavorable circumstances dispositive of her initial intent, since she might not have recognized their significance or might have been unduly optimistic about her ability to perform in the face of them. In The Music Man, when Harold Hill comes clean about his repeated pattern of failing to create promised boys’ bands and the fact that he doesn’t even know how to lead a band, he nonetheless maintains “I always think there’s a band, kid.”53 The possibility of such self-delusional optimism led a few U.S. jurisdictions early in the development of promissory fraud to take an extreme and incorrect position on the probity of unfavorable conditions. Finding the promisor’s lack of intent to perform to be an essential element, these courts

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held that even evidence that the promisor knew of conditions making performance virtually impossible could not alone support a finding of promissory fraud.54 The court in German National Bank, a case we described in chapter 3, expressed the idea this way: “Many a man of optimistic disposition, with youth and energy on his side, has honestly deemed that he could continue business and pay his debts under circumstances which to another of cooler blood would have seemed desperate if not hopeless, and has succeeded. The law permits him to do this without branding him as dishonest.”55 Contemporary courts occasionally employ similar arguments to conclude that knowledge of a low probability of performance is not enough to prove promissory fraud.56 All of this is true so far as the subjective content of positive and opaque promises goes, which is the topic of this section. But the German National Bank court was mistaken in thinking that this is the only thing a positive or opaque promise says. Such promises also say something about the objective probability of performance. We shall therefore return to the relevance of unfavorable circumstances when we discuss this other side of the veracity inquiry. Another form of evidence from at or around the time of promising is evidence of an attempt to deceive the promisee. This is relevant first and foremost to the question of scienter, since an intent to deceive typically means that the promisor’s misrepresentation was a knowing one. But often enough an intent to deceive also indicates the promisor’s intentions with respect to performing. In Victor/Victoria, Julie Andrews enters the restaurant not only knowing that she cannot pay but also with a dead cockroach in her purse. She plans to place the cockroach on her plate after she has finished eating, in the hopes that the restaurant will not charge her for the meal. Clearly this attempt to deceive shows, in and of itself, that Julie Andrews intended not to pay. Evidence of an attempt to deceive is relevant to intent to perform just insofar as the deception is part of larger scheme involving nonperformance or a significant chance of nonperformance. Julie Andrews’s cockroach is probative because the deceit only makes sense as part of a scheme to avoid paying. We provide a more detailed analysis of what sort of evidence a claimant can introduce to show a scheme to defraud below, when we discuss circumstantial evidence that a promissory misrepresentation was made knowingly. There are numerous other sorts of promisor behavior that indicate initial intent but fall outside the above categories. We infer the subjective states of others from the totality of their behavior, attributing to them the beliefs and intentions that make the most sense of what they say and do. Thus a promisor’s actions outside a contractual relationship often demonstrate whether she in-

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tended to perform. For instance, in Famiglietti v. Brevard Medical Investors, the defendant promised to purchase a piece of property to build a nursing home in exchange for the claimant’s withdrawal of a competing application to build one, but then immediately after the claimant complied and before the sale was finalized, the defendant began looking for other sites on which to build.57 As the court held, “the search for a new site immediately after signing the contracts was indicative of [the defendant’s] intent not to perform under the contract.”58 Conversely, a defendant can introduce evidence of her own actions prior to breach, besides partial performance, that indicate an intent to perform. In Trent Partners & Associates v. Digital Equipment Corp., the trial court granted summary judgment in favor of the defendant, which had broken a promise to employ the claimants for three years, based on the fact that defendant’s budget had included the employees’ salaries.59 In State v. Basham, the court overturned a criminal conviction for false promise in part because the defendant, who failed to perform his promise to paint a barn, had used the $614 he had received as an advance payment to buy paint.60 Finally, we must not forget the doctrine of chances.61 Where a promisor makes or has made similar promises that she fails or failed to perform, chances are that she never intended to perform any of them.62 This is the case of Harold Hill in The Music Man, who, it turns out, has a pattern of selling uniforms based on unfulfilled promises to form a band. One breach can be chalked up to bad luck or a change of heart. But Harold’s series of breaches suggest that he never intended to start a band in any of the towns.63 Repeated nonperformance of similar promises suggest that changed circumstances did not cause the breach in question. The promisor tends breach no matter what the circumstances. When applying the doctrine of chances, relevant similar breaches can be contemporaneous or have occurred in the past. In Kent v. White,64 which affirmed a jury finding of promissory fraud where the defendant, a lawyer, had hired the claimant as an expert witness and then failed to pay him, the court emphasized that the defendant had breached a similar agreement with another expert witness in the same case.65 Hammonds v. Turnipseed upheld a jury’s finding of promissory fraud when the defendant failed to pay a brokerage fee, where the defendant had sold 130 properties in the previous ten years, always using brokers, but had only paid commissions twice.66 And the evidentiary power of repetitious breach is vividly shown in the recent example of the Georgia crematorium that, over the course of six or more years, breached more than three hundred promises to cremate.67

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Table 3 Circumstantial evidence of promisor intent with respect to performance 1. The fact of breach. 2. Postpromise events: a. whether there were any changed circumstances that account for a postpromise decision not to perform, b. the length of time between promise and nonperformance, c. whether the promisor made any attempt to perform. 3. Circumstances at or around the time of promising: a. the promisor’s initial awareness of conditions likely to prevent her performance, b. evidence that the promisor intended to deceive the promisee, c. other significant promisor behavior. 4. Other similar unexcused instances of nonperformance (the doctrine of chances).

Other broken promises are probative of the defendant’s intent only to the extent that they are similar to the breach in question and are not otherwise excused or explained. In State v. Basham, for instance, the prosecution in a criminal false-promise case had relied heavily on evidence that the defendant, a contractor who had breached his promise to paint a barn, had failed to perform five other contracting jobs, though “three of the four witnesses gave uncontradicted testimony that he either minimally or substantially performed upon his promises.”68 The appeals court thus overturned the conviction based on the principle that “it is essential that the behavior attributes of the other activities be unequivocal and sufficiently similar.”69 We summarize the various forms of circumstantial evidence of a promisor’s intent with respect to performance in table 3. Circumstantial Evidence of the Objective Probability of Performance

Under our proposed approach, the veracity inquiry is never limited to the promisor’s initial intent. It is also about the objective probability of performance—what a reasonable person would have estimated as the chances the promisor would perform, given the mutually known facts at the time of promising. While the subjective fact of intent is important in determining the truth of a positive or opaque promise, these expressions of intent are material only because they also say something about the probability the promisor will per-

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form. And of course fully warranting and definite-probability representations are about only the objective probability of performance. Because most courts treat promissory fraud as just a promise made without an intention to perform, there is not much case law on these other sorts of promissory misrepresentations. Consequently, our discussion of evidence of the objective probability of performance is more speculative than our survey of proving intent. There is, however, considerable overlap between evidence relevant to a promisor’s intentions at the time of performance and evidence as to the probability of her performance, though the inferences differ. We can begin with some mathematical modes of proof. Thus the fact that the promisor breached her promise, while never sufficient by itself, is relevant to the initial probability of performance. Of course the mere fact that something happened at time T2 does not mean that it was likely to happen at T1. The fact that a throw of the dice comes up sixes does not show that that was the probable result. But when combined with other evidence that the dice were loaded, that fact is relevant to assessing whether it was a probable result. When combined with other evidence that the chances of performance were less than represented, the fact of nonperformance is relevant. Scientific induction provides another form of evidence. A promisor’s failure to perform in the past suggests that it is likely that she will fail to perform in the future. We have already mentioned a case of this sort, Mason & Dixon Lines, Inc. v. Byrd, in which the court found the defendant’s previous failures to dispatch equipment highly relevant to understanding its failure to send the equipment promised the claimants.70 The court in Mason & Dixon was concerned with the defendant’s intentions and therefore emphasized the defendant’s knowledge of these previous instances of nonperformance. That inference only works, however, because the previous failures to perform were evidence of an objectively lower probability of performance in the present instance. The fact that the defendant had failed to perform in the past suggested that it was less likely to do so this time.71 Of course we generally evaluate the probability of something happening not by these mathematical means but by looking at the relevant circumstances and projecting whether they make the event more or less likely. When it comes to predicting someone’s actions, we ask two questions: whether she is likely to be able to do the thing in question and whether she is likely to choose to do so. We have already discussed evidence of the promisor’s initial ability to perform. First on the list of infelicitous circumstances is a purchaser’s insolvency or impending insolvency at the time of sale (recall our criticism of the Wisconsin

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Supreme Court’s attitude toward the optimistic but insolvent young entrepreneur in German National Bank).72 But facts like the promisor’s lack of authority to make an offer, the impracticality of meeting certain deadlines, and lack of necessary expertise can also be relevant. Any number of circumstances at the time of promising can suggest that, when the time of performance arrives, the promisor will be unable to fulfill her promise. Because performance is a matter of choice, the chance that it will happen also depends on whether the promisor is likely to choose not to perform. Consequently, at the time of promising the objective probability of performance also depends on subjective facts about what the promisor intends to do. Most obviously, it will depend on whether the promisor initially intends to perform, doesn’t intend to perform, or affirmatively intends not to perform. A promisor who doesn’t intend to perform is less likely to perform than a promisor who intends to perform, and a promisor who intends not to perform is even less likely to do so. If the promissory representation in question was positive or opaque, then finding that the promisor misrepresented her intention to perform is generally enough to conclude that she misrepresented the objective probability that she would perform. (In the technical terms of chapter 2, establishing that REP1 was false suffices to show that REP1.1 was false; establishing that REP2 was false suffices to show that REP2.1 was false.) This, after all, is why promissory misrepresentations of intent are material. But even where the veracity inquiry concerns a fully warranting or definiteprobability representation (which says nothing about the promisor’s subjective state), the promisor’s intentions remain relevant.73 To return to our favorite example of a warranting promise, proof that the defendants in Ex parte Lumpkin did not intend to perform their promise to obtain the neighboring property would have been strong evidence that their warranting representations were false—whether or not their promise was positive. Another way of showing a low objective probability that the promisor would choose to perform is with evidence that at the time of promising the promisor had a conditional intent to perform and that the condition was unlikely to be satisfied. We have argued for an interpretive regime in which a promisor can have an undisclosed conditional intention to perform without misrepresentation—a conditional intention is generally consistent with an opaque promise and need not belie a warranting or definite-probability representation. (Recall also the tale of Sally and Burt in chapter 2 and our discussion of permissible nonsalient conditions on even a positive promisor’s intention to perform.)

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Nonetheless, a promisor’s conditional intention allows a particular form of evidence that her performance was objectively unlikely. Rumpelstiltskin made an explicitly conditional promise that if the queen would guess his name, he would release her from her obligation to give him her first child. Assuming the promise was positive, it represented a conditional intention to perform. The fact that the condition was unlikely to be met—the queen was especially unlikely to guess a name like “Rumpelstiltskin”—meant that it was highly improbable that he would choose to release her from her obligation.74 A claimant can show that the promisor was unlikely to perform by showing that she had a conditional intention (either disclosed or undisclosed) and that it was unlikely that the condition of her performance would be realized. We can construct a less fanciful example if we modify slightly the facts in Hillcrest Center, Inc. v. Rone, the case in which the defendant promised the plaintiffs additional parking, though she intended to procure the property only if she could find a tenant for the building on it.75 Suppose that the defendant made an opaque promise, and therefore did not misrepresent her intent, but also made a warranting representation—something like, “Don’t worry, you can count on it.” Now if it was likely that she would find a tenant for the property, this representation might well have been true, despite her undisclosed conditional intention. But that would not be so if, say, the property in question was a brownfield and required expensive remediation for even commercial use. Such evidence would indicate that, at the time of promising, the defendant was unlikely to find a tenant and unlikely therefore to choose to perform her promise, and thus that her warranting representation misstated the objective probability that she would perform.76 This point about conditional intentions is especially important because the doctrine of excuses, according to which some changed circumstances automatically allow the promisor to escape her obligation, effectively treats every contractual promise as conditional. Excusing conditions include impracticability, frustration, illegality, and impossibility.77 When a legally sophisticated promisor enters into a contract, she knows of the conditional nature of her commitment, and, in most cases, her intention to perform is also conditional. But if at the time of promising there is a good chance that any of these excusing conditions will be realized, then there is a commensurately high probability that she will choose not to perform. Consequently, evidence that, at the time of promising, it was likely that the promisor’s performance would turn out to be impracticable, frustrated, illegal, or impractical can show that performance was objectively improbable.

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Table 4 Circumstantial evidence of the objective probability of performance 1. The fact of breach. 2. Other similar instances of nonperformance. 3. Circumstances at the time or promising that indicated: a. that the promisor would likely be unable to perform, b. that the promisor would likely choose not to perform (that is, the promisor’s initial intent).

It is important to keep in mind that in all of these situations the issue is not what the promisor knows or intends but just the objective probability of her performance. While a promisor will certainly know if she has a conditional intention, she might not know the chances that the condition will be satisfied— the defendant in our modified Hillcrest Center might not have known that the neighboring property was a brownfield. Similarly, a promisor might not know of conditions likely to render her performance impractical, impossible, or illegal. In these cases, the promisor’s misrepresentation as to the objective probability of her performance is a matter of mistake. But it is still a misrepresentation—which is the only issue in the veracity inquiry. The fact of mistake is relevant to the issue of scienter, which in these cases asks whether the promisor knew or recklessly disregarded the objective probability that she would perform. Again, and in keeping with our taxonomic ambitions, we summarize the results, in table 4. Circumstantial Evidence That the Defendant Made the Misrepresentation Knowingly

We have argued that full-blown promissory-fraud liability should be limited to knowing or reckless promissory misrepresentations. There is nothing special about proof of recklessness. The question is just whether the promisor knew or should have known of the risk of misrepresentation and failed to take all but the most minimal precautions to avoid it.78 In keeping with our selective approach, therefore, we limit our discussion to proof that the promisor made the misrepresentation knowingly. The strongest circumstantial evidence of knowledge is independent evidence (evidence other than the misrepresentation itself ) that the promisor intended to deceive the claimant. Absent such evidence, proof that a defendant-promisor both knew the meaning of her utter-

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ance and knew that it was false is enough to show that her misrepresentation was made knowingly. To do something intentionally is to do it knowingly. Thus the most common and most persuasive form of evidence that a defendant-promisor made a promissory misrepresentation knowingly is independent evidence that she intended to deceive the promisee. And perhaps the most convincing sort of evidence of deceptive intent is a pattern of deception that suggests that the promissory misrepresentation was an element of a larger scheme. Thus Julie Andrews’s ruse with the dead cockroach in Victor/Victoria (placing it on the table in order to avoid paying for her meal) strongly suggests that she intended her promissory misrepresentation (the implicit representation of an intent to pay)—both acts make sense together as part of a larger plan to deceive the restaurateur. It is not uncommon for courts to emphasize other misrepresentations when finding sufficient evidence of promissory fraud. In Popwell v. Greene, the appellate court upheld a jury finding of promissory fraud where the defendant, the administratrix of an estate, had convinced some of the heirs to convey to her an undivided interest in the property, supposedly to protect the estate against a claim, with a promise that the land would be redivided as soon as the claim was settled.79 The court considered it highly probative that when the other, nonclaimant heirs had signed the conveyance, the defendant misrepresented the type of document they were signing (she told four that they were signing a power of attorney and three that it was not a deed).80 These other deceptions suggest that the defendant had a general plan to deceive all of the heirs and thus knowingly misrepresented to the claimants her intent to perform. Here we also see an example of how intent to deceive can be probative not only of scienter but also of the promisor’s intent to perform. Another example is Brungard v. Caprice Records, Inc., which considered an appeal from a trial court’s finding of promissory fraud.81 The defendant, a vanity record company, induced the claimant, who had a ninth-grade education and was “unsophisticated in her knowledge of the recording industry,”82 to pay $3,000 to produce her record, which it then neither promoted nor distributed. In upholding the finding of promissory fraud, the appellate court emphasized other misrepresentations by the defendant—including the fact that it had her audition, though no audition was necessary, misrepresented the size of the company and its plans to build a music entertainment complex, and made false parol statements about the terms of the written contract. Taken together, “[t]he entire presentation of Caprice to this claimant was designed to leave her with a

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false impression as to the character of the transaction.”83 While the court drew the inference only to the defendant’s intent not to perform (the veracity question), this evidence of a general intent to deceive the claimant also shows that the defendant knew it was misrepresenting the probability of performance.84 A common form of intent-to-deceive evidence is a nonperforming promisor’s repeated assurances of performance. Repeated assurances can suggest an attempt to string the promisee along, to induce his continued reliance to the promisor’s benefit. Thus, in In re Cornner, the court found promissory fraud based in part on evidence that the defendant, who had received $4,000 from the claimant to be used to redeem a foreclosed property, repeatedly assured the claimant that he would help her and that the money was in escrow, even after it had been spent.85 And in Gibson v. John D. Campbell & Co., an appellate court reversed a grant of summary judgment to the defendant, reasoning that the defendant had repeatedly assured the claimant it would perform repairs pursuant to a warranty deed and expressly refused to carry them out only after the fouryear statute of limitations had run.86 Again, the defendant’s repeated unfulfilled assurances suggest a general intent to deceive the claimant, from which the court could infer that it made the promissory misrepresentations knowingly.87 Another sort of misrepresentation that can indicate intent to deceive is the defendant’s denial that she ever made the promise in question. When prior to litigation a promisor denies having made a promise that she did in fact make, that denial is a misrepresentation like any other and should be considered evidence of an intent to deceive the promisee.88 More problematic is the promisor who denies having made the promise as part of her defense to the claim of promissory fraud or of breach of contract. Many courts consider such denials relevant to the defendant’s initial intent to perform,89 and some courts have even found a defendant’s testimonial denial of her promissory representation sufficient to support a finding of promissory fraud.90 Such inferences are highly problematic, for reasons similar to our argument against using a defendant’s in-court testimony that she had a different understanding of the terms of her promise to show that she did not intend to perform. For one thing, using such testimony as evidence of an intent to deceive or of no intent to perform threatens to blur the line between breach of contract and promissory fraud. As a Florida court put it, “If we did adopt this interpretation, a fraud claim and a possible punitive damages claim would be available in every case involving an alleged breach of a contractual agreement where the other party denies the existence of the contractual agreement.”91 And using in-court denials of the

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promise forces a defendant to choose between admitting a promissory representation, which she might not have made, and giving the claimant evidence that she did not intend to perform. The Oregon Supreme Court correctly diagnosed this problem: “Such denial implies not at all that, if the promise were made, there was no intention to perform. And it certainly does not bar the defendant, when the evidence is all in, from saying to the plaintiff: ‘Even though the trier of fact may believe I made the promise, there is no proof that I did so fraudulently because of an intention not to perform.’ Bad indeed would be the case of the honest man who has made no such promise, if when falsely charged with it, he may not deny it without having his truth considered as some evidence either that there was such undertaking or that it was deceitfully made.”92 While a defendant-promisor’s other misrepresentations can be very probative of her intent to deceive, the fact that in the course of litigation she denies making the alleged promise should be excluded from consideration. Evidence of a general scheme of deception is not limited to other lies. It can also include other behavior that suggests such a plan. If Harold Hill buys a train ticket out of Gary for the day the band uniforms are supposed to arrive, that act, while not in itself deceptive, suggests that something fishy is afoot. This sort of evidence is most common in criminal cases, where defendants typically have engaged in sustained schemes to deceive their victims.93 But one also encounters it in civil cases. In Beijing Metals & Minerals Import/Export v. American Business Center, for instance, the court emphasized that during negotiations the defendant had insisted that certain provisions, to which it orally agreed but failed to adhere, not be included in the written contract, using as a reason that the Chinese government would not allow such terms.94 In Gadsden Paper & Supply Co. v. Washburn, the defendant, who had promised the claimant two years of employment with guaranteed commissions, gave the claimant inferior accounts and treated him differently from other employees, suggesting that it was trying to manufacture a pretext to fire him.95 And in Hammonds v. Turnipseed, the defendant waited six months to reopen negotiations with a prospective purchaser, whom the claimant-broker had located, thereby using a statutory six-month limitation on brokerage agreements to his advantage.96 While none of these actions is a misrepresentation per se, each suggests a plan on the defendant’s part to defraud the claimant by way of the promissory representation. Deceptive purpose can also be shown by the promisor’s attempt to exploit promisee reliance. For instance, in Mannington Wood Floors v. Port Epes Transport, the defendant asked to renegotiate a contract to haul wood chips after the

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claimant had invested $500,000 in equipment to be used under the original contract.97 In Baker v. State, a criminal case, a roofing contractor tore off the victim’s roof and then demanded another $200 to purchase materials.98 In Lane v. Fabert, the defendant pawnbroker continued to receive installment payments on a ring that the claimant had allegedly pawned, despite the fact that he had already sold the ring.99 Where a promisor’s postbreach benefit from the promisee’s reliance is not merely incidental but the result of her exploiting the situation, it is much more likely that all of her acts are the result of a plan to defraud the claimant and that her promissory misrepresentation was a knowing one. Finally, we should not forget the doctrine of chances. Pattern evinces plan. Just as a string of similar broken promises can suggest that the promisor never intended to keep any of them, so can it suggest that they were all made with the intent to deceive. Similar breaches can thus serve both the veracity and the scienter inquiries. While an intent to deceive is the most common type of evidence that a defendant made the promissory misrepresentation knowingly, it is not essential. We have argued that to misrepresent knowingly some fact T with representation R, a speaker must know, first, the underlying facts (that T is not the case) and, second, the meaning of her speech act (that R says that T is the case). While an intent to deceive can suffice to show that these conditions are met, it is hardly necessary. It is virtually axiomatic that a speaker knows her own intentions.100 And even if the misrepresentation in question concerned only the objective probability of performance, proof that the promisor was aware of how things stood can be close at hand (the insolvent purchaser). In order to know the meaning of a promissory representation, the defendant must understand both the terms of her promise—just what it obliges her to do—and the content of her promissory representation—what it said about the probability of her performance (whether it was positive or opaque, warranting, semiwarranting or nonwarranting, and so on). Absent evidence to the contrary, a court should presume that a defendant knew the objectively reasonable meaning of her promissory representation. The representation inquiry, which seeks out the objective meaning of the defendant’s promise, therefore suffices to create a prima facie case that the defendant-promisor knew what she was saying. A defendant can rebut this presumption with evidence that she had a different understanding of her words or actions.101 These results are summarized in table 5.

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Table 5 Circumstantial evidence that the defendant made the promissory misrepresentation knowingly 1. Evidence that the promisor intended to deceive the promisee: a. other misrepresentations, including continued assurances that the promisor would perform, b. other promisor behavior that indicates an intent to deceive, c. attempts to exploit the promisee’s reliance, d. other similar breaches. 2. Evidence that the promisor knew both: a. the underlying facts (her intentions or the objective probability of her performance), and b. the meaning of her promissory utterance, including both: i. the scope of her promise and ii. what it represented about the probability she would perform.

STRUCTURAL EVIDENCE OF MOTIVE AS EVIDENCE OF INTENT

One form of circumstantial evidence deserves separate treatment. This is structural evidence of the promisor’s motive or reason for acting. (We use the terms motive and reason interchangeably, with the caveat that the latter is meant relative to the promisor’s beliefs.) Whether or not a defendant-promisor initially expected to gain more from performing or from not performing is highly relevant to whether or not she intended to perform—a central question in the veracity inquiry. Whether or not she had a reason to represent the probability of performance as higher than it actually was is probative of whether she intended to deceive the promisee—a central question in the scienter inquiry.102 Evidence of motive, standing alone, is never sufficient to show intent. The fact that a defendant had at time T1 a reason to act wrongly at T2 and then did act wrongly at T2 does not mean that she intended to do so at T1. Thus, in Connecticut General Life Insurance v. Jones, the court held as insufficient evidence that an employer had a motive to misrepresent his intention to pay an employee, finding that in “every case involving an employment agreement, an employer’s profits are tied to expenses and will increase if the employee is paid less.”103 But while never dispositive, motive evidence is relevant to questions of intent, since a person’s intentions are often based on her beliefs about what is in her best interest. And a defendant-promisor’s lack of motive is extremely probative. Evidence that at the time of promising the defendant-promisor ex-

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pected to benefit more from performing than from not performing is a good indication that she probably intended to perform. Evidence that she would not have expected to benefit from the alleged promissory misrepresentation can show she did not intend to make it, and thus probably did not make it knowingly. We consider the role of motive evidence in the veracity and in the scienter inquiries in turn. The Veracity Inquiry: Motive Not to Perform

In order to get at when a promisor has, at the time of promising, a motive not to perform, we first need a more general understanding of reasons for promising. Generally speaking, a person has a reason to make a promise just when she believes that her potential benefit from the promisee’s reliance outweighs the potential costs of promising, including both the costs of her performance and the costs should she choose not to perform. This can be represented schematically by saying that a rationally self-interested party will choose to promise just where: promisor’s cost promisor’s cost of performance, of nonperformance, promisor’s value discounted by discounted by the   of promisee’s the probability probability that reliance that promisor the promisor will perform won’t perform We can rephrase this mathematically with the following variables: Pp  probability of promisor’s performance Rp  promisor’s net benefit from promisee’s reliance in case promisor performs Rb  promisor’s net benefit from promisee’s reliance in case promisor doesn’t perform104 CA  promisor’s cost of performance D  promisor’s expected cost of damages in the case of nonperformance Given these definitions, the above condition can be rewritten as: (1)

(Pp )(Rp )  (1  Pp )(Rb )  (Pp )(CA)  (1  Pp )(D)

This is the promisor’s participation constraint, the conditions under which it is in her interest to make a promise. A rationally self-interested person has a motive to promise only if she believes that (1) is true.

The Veracity and Scienter Inquiries

A rationally self-interested promisor who, at the time of promising, intends not to perform has made two calculations. First, she has decided that the net benefits from not performing the promise (the benefits from the promisee’s reliance less anticipated damages) outweigh the net benefits from performing it (the benefits from the promisee’s reliance less the costs of performance). Using the above variables, we can express this as: (2)

Rb  D  Rp  CA105

Second, the promisor has decided that she stands to benefit more from promising and not performing than from not promising at all. Substituting Pp  0 in (1) above, we arrive at: (3)

Rb  D

Stated in plain English, a promisor has a motive to make a promise she intends not to perform only when she believes, first, that she stands to gain more from not performing than from performing and, second, that her expected benefits from the promisee’s reliance outweigh the anticipated costs of nonperformance. Where the issue is the promisor’s initial intent to perform, the question is whether she believed that (2) was satisfied. This can be shown with evidence that the promisor expected to benefit significantly from the promisee’s reliance, even in the case of nonperformance (high Rb ), that she anticipated that performance would be very expensive (high CA), or that she predicted that her nonperformance would cost her little or nothing (low D). A defendant who argues that, at the time of promising, she believed that it was in her interest to perform would, of course, submit evidence tending to show the opposite. While this schematic might look highly technical, it simply makes explicit a common form of reasoning that is well within the capacity of legal fact finders. In many cases, proof of the promisor’s beliefs as to any one or another variable will be enough, since a promisor’s participation constraint can be judged against a fact finder’s background understanding of her interests. Recall from chapter 5 Carly’s promise to Warren to mow his lawn for the National Lawn Darts Championship, where Warren claims that she intended all along to threaten nonperformance at the last minute and extort a higher price. Warren’s argument will be bolstered if he can show that Carly expected to benefit greatly by inducing Warren’s reliance and then using her holdup tactic (high Rb ). Or he could show that Carly’s anticipated breach-of-contract damages were relatively small (low D), either because she didn’t anticipate enforcement (she

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expected Warren to pay the holdup price) or because she knew that Warren’s damages would mostly be nonrecoverable emotional and reputational harms. Alternatively, if Carly can show that she believed that Warren’s neighbor was an unemployed lawn-care worker (low Rb ) and that she expected Warren to suffer significant recoverable economic harms if his lawn wasn’t mown (high D), that would be evidence that she initially had a reason to perform. Now one of the purposes of the law of promissory fraud is to raise the probable expected costs of damages (our D) to the point where it will never be in a promisor’s interest knowingly to misrepresent her intention to perform. Under a perfectly functioning system of promissory fraud, then, there would never be motive evidence that a promisor misrepresented her intentions—the expected costs of doing so always outweigh the potential gains. While this says something important about the point of promissory-fraud liability, it does not have serious consequences for the way motive evidence actually functions. First, perfect deterrence of culpable promissory misrepresentations is aspirational, not actual. Though promissory fraud is structured to deter knowing promissory misrepresentations, in some cases the profits of deceit will still outweigh its costs. Second, and more important for understanding how motive evidence works, it is not the actual anticipated damages that are relevant to motive but what the promisor believed them to be. People often underestimate the costs of their actions. A claimant need only prove that, at the time of promising, the defendant believed that it was in her interest to do one thing, despite her representation of an intention to do something else.106 Our formalization is especially useful for understanding evidence that a promisor did not intend to perform because she had an unrevealed conditional intention—she promised to x, though she intended to x only if C. A promisor has a reason to perform only on a certain condition if she stands to benefit more by performing when that condition is met and to benefit more by breaching when it is not. We can express this by reformulating (2) as follows. In order to find it in her interest perform if and only if C, a promisor must believe: (4)

If C, then Rb  D Rp  CA, otherwise Rb  D  Rp  CA

The same sorts of evidence—for example, the promisor’s potential gains in the case of her nonperformance, her costs of performance, and her expected damages—will be relevant here, though now those costs and benefits are calculated relative to whether or not C obtains. Thus in Hillcrest Center, Inc. v. Rone, where the defendant allegedly intended to perform her promise to secure an adjacent property to provide parking only if she found a tenant for a building on

The Veracity and Scienter Inquiries

it, it would be highly relevant if the claimant could show that without a tenant, the defendant would have lost money by acquiring the land. Alternatively, if the defendant could show that the land was so cheap that even without a tenant it would have been less expensive for her to buy it and provide the promised parking than risk an action for breach of contract, she could show that the alleged conditional intention wasn’t motivated and that she probably simply intended to perform. The Scienter Inquiry: Motive to Promise Certain Terms or to Represent a Certain Probability of Performance

As we have emphasized throughout this book, promisors make their promissory representations in order to convince promisees that it is in their interest to rely. A promisor has a reason to promise certain terms or to say something about the probability of performance just when she thinks that without such assurances the promisee won’t choose to rely. In chapter 5 we discussed how a promisor’s motive to say one thing or another can be used in the representation inquiry as evidence of what the promisor said.107 Motive can also be evidence that the promisor intended to say what she said—that is, that she said it knowingly. This is not yet to show that her misrepresentation was a knowing one, since she might have been mistaken about the facts. But it’s halfway there. Courts don’t often emphasize evidence of a promisor’s motive to promise certain terms, but examples where they might have are easy enough to come by. Probably the most common form is the course of precontractual negotiations. Thus, in Mason & Dixon Lines, Inc. v. Byrd, the defendant, Mason and Dixon Lines, claimed that its statement that it would support the claimant in acquiring shipping equipment was “mere puffery,” not a promise.108 But the claimant testified that he was “reluctant to sign with Mason and Dixon because he feared that Mason and Dixon would not supply him with adequate equipment and that Mason and Dixon would take the agency away after he had worked to build it.”109 Assuming that Mason and Dixon was aware of the claimant’s trepidation, this suggests that it had a reason to promise him support and intended its statement as a promise.110 Similarly, if the promisor believes that the promisee has doubts about whether she will perform, she has a reason to make an additional promissory representation that she will do so. In Lumpkin, the defendants knew that failure to acquire the adjacent property for a parking lot would render the claimants’ lease valueless. They thus knew that the claimants required assurance not only

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that the defendants intended to help them acquire the property but also that they were so likely to succeed in doing so that the claimants could safely rely on it. This gave them a reason to make a warranting representation—whether or not it was true and whether or not they had sufficient knowledge to make it— and gives us grounds for thinking that they intended their potentially ambiguous statements (“The owner was good for his word;” “Don’t worry about it, because we’ll have the property by the end of the week”) to be understood as warranting representations. Conversely, proof that a defendant did not have a reason to include certain terms in her promise or to make a given promissory representation can be evidence that she did so unintentionally, without knowing what she was saying. Most probative is evidence that the defendant had nothing to gain from the claimant’s reliance, that is, that the alleged promise was without consideration.111 For example, there are a number of promissory-fraud cases arising out of bank officers’ alleged promises to approve loans later denied.112 In most such cases, a bank has little or nothing to gain by promising approval before the formal approval process. If such a representation was made, it was most likely not made knowingly but was a matter of (perhaps reckless) mistake. Alternatively, where a promisee has very low reliance costs, he might not require assurance that the promisor intends to perform. This is the case, for instance, in some sales contracts where payment is not due until delivery. In these situations, the seller has no reason to make a high-assurance representation. Quite the contrary—given the potential liability that comes with making them, she has good reason to avoid them. If a court nonetheless finds that she did in fact make such a representation, then it was probably a matter of mistake (possibly reckless), rather than a knowing misrepresentation. * * * This completes our tour through the varieties of evidence that claimants can use to show that a promissory representation was false or that the defendant acted culpably in making it and evidence that defendants can use to rebut such allegations. In addition to identifying specific evidentiary pitfalls—such as the use and abuse of defendants’ in-court reports of their initial intent or defendants’ denials that they made the promise in question—we hope we have convinced the reader, first, that in many cases it is indeed possible to prove with a high degree of certainty that a defendant committed promissory fraud and, second, that the modes of such proof are clear enough as to allow judicial monitoring of the sufficiency of the evidence. There are ways of thinking about the

The Veracity and Scienter Inquiries

privacy of mental states and about the inherent uncertainty of future events that, when one abstracts from real cases, can make it seem as if proof of promissory fraud must either be impossible or leave so much discretion to the jury that the action will have a tremendous chilling effect on desirable contracting activity. While we appreciate the power of these abstract worries, attention to actual cases shows that they do not correspond to what happens in practice.

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Chapter 7 The Landscape of

Promissory Misrepresentation

In the classic promissory-fraud case, one party to a legally enforceable contract enters into the agreement intending not to perform her end of the bargain. We have argued for extending the classic definition by taking notice of the many different things that a promise can say— and sometimes not say—about the probability of performance. So far, however, we have largely limited our discussion to promises that create legally enforceable contracts. But similar misrepresentations can occur in a wide array of situations—both before and after formation, where formation fails on other grounds, and even where the parties don’t contemplate a binding contract but nonetheless engage in promissory behavior. This chapter extends the analysis in these directions and describes the variety of contexts in which promissory misrepresentations and their analogues arise. We distinguish and discuss six members of the family: nonpromissory misrepresentations of intent, false predictions, bad-faith precontractual negotiating, insincere promises where there is no enforceable contract, promissory misrepresentations where there is an enforceable contract, and postformation misrepresentations. We argue that, while legal liability for promis142

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sory-like misrepresentations is appropriate in most of these contexts, it is not in all. In particular, it turns out that some (but not all) promises that do not create contractual obligations should not give rise to liability for promissory misrepresentation.1

NONPROMISSORY REPRESENTATIONS OF INTENT

We have argued that both philosophers of language and legal thinkers have neglected the fact that promises are used to say things, including that the promisor intends to perform. There are, of course, many other ways a person can say what her intent is, most obviously with the words “I intend to. . . . ” While the law of nonpromissory misrepresentations of intent is less developed than that of promissory fraud, it is today fairly clear that those misrepresentations can give rise to liability for deceit. Thus Prosser and Keeton, citing Lord Bowen’s gastronomic apothegm, conclude that “[s]tatements of intention, whether of the speaker himself or of another, usually are regarded as statements of fact” and are therefore actionable.2 The Second Restatement of Torts adopts the same position, though with an interesting twist that that recalls our analysis of the representation inquiry. Section 530 distinguishes between first- and third-person statements of intent. (1) A representation of the maker’s own intention to do or not to do a particular thing is fraudulent if he does not have that intention. (2) A representation of the intention of a third person is fraudulent under the conditions stated in § 526.3

Section 526 establishes the scienter requirement in actions for deceit. The drafters explain their different treatment of first- and third-person attributions of intention by commenting that if the speaker does not have the stated intention, “he must of course be taken to know that he does not have it.”4 Here the Restatement makes an error we diagnosed in chapter 3, which is to assume that a misrepresentation of the speaker’s intent is perforce an intentional misrepresentation. This overlooks cases in which the speaker misunderstands the objective meaning of her own words. One commonly litigated category of express statement of intent is where the buyer of a piece of real estate makes representations about her intended use of the property. For example, in Whitcomb v. Moody, Moody purchased a lot from Mrs. Whitcomb, representing that he intended to use the land for residential

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purposes, though Whitcomb claimed that he intended all along to use it to open a hamburger joint.5 Keeton notes a crucial distinction in such cases, which is whether the buyer’s intention is material because it relates to the value the buyer attaches to the property or because it relates to other interests of the seller or a third party.6 Suppose Whitcomb considered Moody’s intent material only because she knew he would pay a higher price for a commercial use. As Keeton points out, we don’t expect negotiating parties to reveal their idiosyncratic valuations of the transaction. Consequently, if Whitcomb cared about Moody’s intent only because she thought she might be able to extract a higher price, Moody’s misrepresentation shouldn’t give rise to an action for fraud.7 In fact, however, Whitcomb cared about his intent because the lot was in a subdivision that Whitcomb was selling as a residential community. Moody’s plans were material not because Whitcomb wanted to charge a higher price but because a nonresidential use would harm her other interests. Consequently, the court was right to hold that his misrepresented intent could give rise to liability for fraud. One recently evolved species of nonpromissory misrepresented intent of a different sort is what is known as “vaporware.”8 Vaporware is produced when, for instance, a dominant software company falsely announces its intention to introduce a new product so as to dissuade its competitors from introducing similar products or to convince consumers to hold off purchasing products already on the market. Microsoft is widely regarded as a regular distributor of vaporware. For instance, within two weeks of VisiCorp’s October 1983 announcement that it would begin shipping a graphical user interface, Microsoft made “what was at that time the most elaborate product introduction in industry history for Windows” and predicted that Windows would be on 90 percent of all IBM-compatible computers by the end of 1984.9 In fact, Windows wasn’t even released until the end of 1985. “During this time, the vaporware version of Windows was competing with every other windowing product on the PCcompatible market, damaging potential competitors.”10 From our perspective, where there is proof of all the elements of deceit— which include that the statement was false at the time it was made, that it was made recklessly or fraudulently, and, what is particularly important in the nonpromissory context, that it was made with an intent to induce reliance—such misrepresentations should be actionable.11 While the speaker and hearer are not in a contractual relationship, credible statements of intent create value by enabling industry participants to predict where innovation is heading and to adjust their actions accordingly. One might object that if everyone in the in-

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dustry is distributing vaporware, it’s not reasonable to rely on such representations and thus no action for deceit should lie. But that argument presupposes its conclusion—if it is currently unreasonable to rely on software pronouncements, then that is in part because they are not backed up by sufficient legal guarantees. It’s interesting to compare our analysis of how a promissory-fraud claimant can prove initial intent with the evidence of Microsoft’s vaporware practices. Besides the direct testimony of Microsoft employees,12 the strongest evidence that Microsoft misrepresented its intent to introduce new products is its “almost enchanted inability to meet its ship dates.”13 This reasoning is exactly the same as the doctrine-of-chances inference from repeated breaches we discussed in chapter 6. We would add that because Microsoft was obviously aware of its earlier failures, at least in the later instances it should have known that its predictions were overly optimistic (attributed scientific induction)—more evidence that it didn’t really intend to meet the deadline and that it knew it was misstating the probability that it would do so. Our discussion of vaporware shows that even unbargained-for reliance induced by misrepresentations of intent should be sufficient. Hence promissoryfraud actions might lie not only in the cases where promissory estoppel is accompanied by misrepresentations of intent but also where even without promise, a speaker’s nonpromissory prediction of the future misrepresents the speaker’s true intent.

PREDICTIONS

We have argued that another—and in fact more fundamental—dimension of what promises say concerns the objective probability that the promisor will perform. In this respect too promises can be considered but one species of a genus, here statements about the present probability of future events. The traditional common-law rule is that a statement can give rise to an action for fraud only if it concerns a past or present fact.14 Thus the utterance “It won’t rain tomorrow” cannot be the grounds for a claim of fraud. One explanation for this rule is that a prediction is, at the time it is made, neither true nor false. Alternatively, Prosser and Keeton suggest that “[o]rdinarily a prediction as to events to occur in the future is to be regarded as a statement of opinion only, on which the adverse party has no right to rely.”15 But this cannot be the whole story. Suppose Iris, a meteorologist, knows that a mass of warm, moist air is fast approaching from the south, which will almost

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certainly collide with the cold air now overhead and result in precipitation. Yet when Bob tells her he is thinking about organizing a picnic the next day, she tells him, “It won’t rain tomorrow.” Clearly we have here a case of intentional misrepresentation. How can this be squared with the above observations about future statements? Part of the answer is obvious. So far as justifiable reliance goes, it is the fact that Iris is a meteorologist that gives Bob the right to rely on her prediction. Thus Prosser and Keeton allow: “[A]s in the case of any other opinion, it has been held that there may be reasonable reliance upon the assertion where the speaker purports to have special knowledge of the facts which would justify the expectations he is raising.”16 This is consistent with our explanation of why it is usually reasonable for a promisee to rely on a promisor’s representations about the probability of performance. The promisor typically knows more about the conditions likely to affect her ability and desire to perform. But what about the fact that a statement about the future is, at the time it is made, neither true nor false? Prosser and Keeton answer that the prediction of a future event also says something about the present state of the world: “Such prophesy does, however, always carry an implied representation that the speaker knows of no facts which will prevent it from being accomplished.”17 That is, the prediction also says something about the speaker’s present beliefs. The Second Restatement takes a similar line: “[A] statement that is in form a prediction or promise as to the future course of events may justifiably be interpreted as a statement that the maker knows of nothing which will make the fulfillment of his prediction or promise impossible or improbable. Thus a statement that a second-hand car will run fifteen miles on a gallon of gasoline is an implied assertion that the condition of the car makes it capable of so doing, and is an actionable misrepresentation if the speaker knows that it has never run more than seven miles per gallon of gasoline.”18 Iris’s prediction that it will rain tomorrow also says that she believes that it will rain tomorrow. Because her belief is as much a fact as her indigestion, her prediction also says something that can be true or false. While we are glad to see commentators recognizing that a single language act can have multiple semantic dimensions, we believe that this approach fails to capture everything a prediction says about the present state of the world. In addition to saying something about the speaker’s subjective beliefs, a prediction also typically says something about the objective probability that the predicted event will come to pass. And this too is a statement of existing fact that can be true or false when uttered.19 If this is not obvious, think about the chances of

Landscape of Promissory Misrepresentation

winning a coin toss. It is simply false to say that there is a 60-percent chance that a tossed coin will come up heads. What we gain by acknowledging this third semantic dimension of predictions is an account of how it is that a speaker’s prediction might constitute a reckless misrepresentation of an existing fact. If you assume that the only thing a prediction says about the world as it exists right now is that the speaker has a certain belief about the future, then you might think that every currently false prediction is a knowing misrepresentation, since a speaker necessarily knows what she believes. We noted one reason why this would be wrong above: the speaker might not understand the meaning of her own words. But it is also wrong for another reason. Suppose that Iris the meteorologist honestly believes that it won’t rain tomorrow. She believes this, however, because right before analyzing the data she enjoyed a three-martini lunch. When Iris says to Bob (who knows nothing of her lunch), “It won’t (hic) rain tomorrow,” she does not misrepresent her belief. Nor is her misrepresentation made knowingly. But she has deceived Bob, who knows that Iris is a meteorologist and reasonably believes that her predictions are good indicators of the objective probability of tomorrow’s weather. Iris has recklessly misrepresented the present probability of rain. It is therefore more useful to think of a prediction as saying not only something about the speaker’s beliefs but also something about the objective probability that the event in question will come to pass. A statement about the future can also be false because it can misrepresent the present probability of a future event.20 It’s worth noting that there is at least one area of the law where predictions have been regularly accepted as the basis for claims of fraud. It is black-letter law that forward-looking statements are actionable under section 10(b) of the Securities Exchange Act of 1934, the primary vehicle for private claims of securities fraud.21 And up until 1995, the law in this area recognized that predictions say something not only about the speaker’s beliefs but also about the objective probability of the predicted event, for it was generally allowed that a plaintiff need only show reckless disregard—not knowledge—to establish liability for forward-looking statements.22 That is, a plaintiff did not need to show that the defendant believed that the objective probability of the predicted event was other than as represented. The Private Securities Litigation Reform Act of 1995, however, raised the scienter bar on allegations of securities fraud by requiring plaintiffs claiming false forward-looking statements to show that the prediction “was made with actual knowledge . . . that the statement was false or misleading.”23 It is therefore no longer necessary to distinguish between predictions

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that are false because they misrepresent the speaker’s beliefs and predictions that are false because they misrepresent the present objective probability that the event will come to pass. Any false representation that meets the latter description is now actionable only if it also meets the former.24

PREFORMATION PROMISES

Bare statements of intent and predictions shade into promissory representations when they are made in precontractual negotiations. Much ink has been spilled over the question of whether contractlike liability should attach in precontractual negotiations. At least since Hoffman v. Red Owl in 1965, some courts have allowed gratuitous promises or assurances that one will make or accept a future offer to support an award of promissory estoppel.25 The arguments for and against such liability are by now well rehearsed.26 We are sympathetic with the position that precontractual liability is desirable in some contexts. Here, however, we want to argue that even if we don’t impose contractlike duties on negotiating parties, it is appropriate to hold them liable for their precontractual misrepresentations of intent. In fact, by imposing liability for such misrepresentations, we can prevent the most egregious and injurious precontractual misdeeds, thereby making all the more palatable the idea of freeing the parties from Red Owl–type liability. Ironically enough, Red Owl itself provides an object lesson in how such liability might operate. In that case, the Wisconsin Supreme Court considered the situation of a prospective franchisee—one Hoffman—who was induced to comply with what turned into a series of increasingly onerous franchise conditions. As countless law students have read: The record discloses a number of promises and assurances given to Hoffman . . . upon which [the Hoffmans] relied and acted upon to their detriment. Foremost were the promises that for the sum of $18,000 Red Owl would establish Hoffman in a store. After Hoffman had sold his grocery store and paid the $1,000 on the Chilton lot, the $18,000 figure was changed to $24,100. Then in November, 1961, Hoffman was assured that if the $24,100 figure were increased by $2,000 the deal would go through. Hoffman was induced to sell his grocery store fixtures and inventory in June, 1961, on the promise that he would be in his new store by fall. In November, plaintiffs sold their bakery building on the urging of defendants and on the assurance that this was the last step necessary to have the deal with Red Owl go through.27

The series of subsequently unfulfilled assurances suggests that Red Owl may not ever have intended to grant a franchise for the initial amount quoted, or at

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least that it recklessly misrepresented the probability that it would do so. As we emphasized in chapter 6, repeated assurances without performance can be evidence both of lack of intent (the doctrine of chances) and of a low probability of performance (scientific induction). Indeed, the smell of promissory fraud— or at least of negligent promissory misrepresentation—emanating from these facts might be an important factor in explaining both why the Red Owl court was willing to impose precontractual liability and why other courts have generally failed to follow the invitation to extend promissory estoppel to failed negotiations.28 There is no reason to countenance such deceptive negotiating behavior. As the facts in Red Owl show, engaging in precontractual negotiations can be costly—not only in time invested but also in lost opportunities to contract with other parties and in good-faith preparatory investments that, in the event of a contract, will benefit both parties. And there is a strong intuition that the very act of negotiating implicitly represents at least that you do not intend not to enter into a contract—that you aren’t stringing the other party along. In some contexts, like where the other party can be expected to incur significant negotiation costs, it may even represent that you affirmatively intend to contract.29 These representations, be they implicit or explicit, create value because they enable parties to stay on the road to mutually beneficial contracts. The law should therefore back them up by imposing liability when they are false. And when such misrepresentations are made knowingly or recklessly, punitive damages are appropriate. The application of precontractual liability for misrepresented intent isn’t limited to Red Owl –type situations. These issues are also raised in what are referred to as “bait and switch,” or often simply “bait,” advertisements. The Federal Trade Commission Guides Against Bait Advertising define the practice in classic promissory-fraud terms: “Bait advertising is an alluring but insincere offer to sell a product or service which the advertiser in truth does not intend or want to sell. Its purpose is to switch consumers from buying the advertised merchandise, in order to sell something else, usually at a higher price or on a basis more advantageous to the advertiser.”30 Some state legislatures have declared bait advertising to be a crime, but subject violators to only rather mild misdemeanor sanctions.31 As one treatise opines: “Neither the law of contracts nor ordinary judicial remedies have been of great help to the unwary consumer who is persuaded to make the switch.”32 The logic of promissory fraud provides to our minds a way of providing protection that may now be lacking. In fact, one can read the classic prohibition on bait advertisement articulated

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in Lefkowitz v. Great Minneapolis Surplus Store as motivated by just such a concern.33 In this staple of the first-year curriculum, Lefkowitz appeared on successive Saturdays at the defendant’s store and attempted to accept its offers, published in the local newspaper, to sell a new fur coat and then, on the second Saturday, a lapin stole for only “$1 Each.” The case ultimately turned on the specificity of the defendant’s advertisements, with the court enforcing only the more definite offer. More relevant for our purposes are the circumstances of the defendant’s refusal to honor its newspaper offer: “On both occasions, the defendant refused to sell the merchandise to the plaintiff, stating on the first occasion that by a ‘house rule’ the offer was intended for women only and sales would not be made to men, and on the second visit that plaintiff knew defendant’s house rules.”34 The advertisements in question did not give any indication that the offer was meant to discriminate against men, and the circumstances of the defendant’s refusal gives rise to an inference that the defendant’s invocation of this “house rule” was pretext, merely an excuse not to sell to Lefkowitz or anyone else. Unfortunately, the court’s decision does not tell us whether the store in fact sold the coats to the first woman who attempted to accept the offers. If the store never sold any coats at the advertised price, that is, made no attempt to perform, this would strongly suggest that the ads were fraudulent in just this “bait and switch” sense. But even this is not necessary. The defendant repeated the advertisement again, with its promise “First Come, First Served,” after the first time it failed to make good on it. The defendant knew that it hadn’t performed the first time, and thus knew or should have known when it made the offer again that it was unlikely to perform.

DEFECTIVE FORMATION

There are numerous possible defects in formation that will prevent a successful action for breach of contract—from procedural rules like the Statute of Frauds to the express choice of the parties to substantive considerations of public policy. The drafters of the First Restatement of Contracts assumed that a contract had to be enforceable in order to give rise to an action for promissory fraud.35 The Second Restatement has rejected this view, though it does not articulate a theory of when an unenforceable promise can be an actionable misrepresentation of intent.36 We find that there is no one answer to whether nonenforceability should preclude an action for promissory fraud or promissory misrepresentation. Whether these causes of action should lie depends on the policy rationales for foreclosing the action for breach. We examine seven sorts of

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promise that do not create a contractual duty to perform: mere puff, violations of the Statute of Frauds or the parol evidence rule, lack of consideration, illusory promises, agreements with tinalea clauses, promises that are unenforceable as against public policy, and procreative and political promises. Mere Puff?

Where a representation is found to be mere puff, it does not give rise to an action for breach of contract. In most cases, there should also lie no action for promissory insincerity. A statement is mere puff when it is objectively unreasonable to rely on it. Though it has the form of a statement of fact or a promise, it is better understood as an encouragement or exhortation. In most cases, this also means that the puff says nothing as to the speaker’s intentions or the probability of her performance—not even that she doesn’t intend not to perform. There is therefore no basis for a claim of promissory fraud or promissory misrepresentation. As an example, consider Leonard v. Pepsico, in which the plaintiff took the defendant beverage company up on its advertised “offer” that it was possible to buy a Harrier Jet with a sufficient number of “Pepsi points”—points that, it turned out, could be accumulated for a fraction of the jet’s market value.37 As the district court noted when it rejected the plaintiff ’s breach-of-contract claim, the ad had an outlandish, joking quality. Unlike cases where a binding offer is found (see Carbolic Smoke Ball below), the ad nowhere intimated that Pepsi meant the “offer” to be taken seriously. We would not, therefore, condemn Pepsi if it admitted that it intended not to perform this “promise.”38 More difficult evidentiary questions arise when a speaker makes what could be construed as an offer for a unilateral contract but argues that it was intended as mere puff. Consider the old chestnut, Carlill v. Carbolic Smoke Ball.39 Here the seller famously promised: “£100 reward will be paid by the Carbolic Smoke Ball Company to any person who contracts the increasing epidemic influenza, colds, or any disease caused by taking cold, after having used the ball three times daily for two weeks according to the printed directions supplied with each ball. £1,000 is deposited with the Alliance Bank, Regent Street, showing our sincerity in the matter.”40 The court found that this language sufficed to create a contractual obligation. From our perspective, if the plaintiff could show the company did not intend to pay this reward to unhealthy users, the company should be subject to a claim for promissory fraud. And there is evidence that this was so. Carbolic Smoke Ball argued to the court that the advertisement was a mere puff and that any agreement was a nudum pactum. Given

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these positions, one can imagine the court finding that the company intended not to perform because the company did not believe that it made an offer capable of legal acceptance or a promise supported by consideration. Now in chapter 6 we criticized the practice of taking a promisor’s in-court interpretation of the scope of her promise as conclusive evidence of her intentions. In doing so, one runs the risk of deterring defendants from legitimately arguing an alternative interpretation of the contract (“What I meant was . . .”) by threatening to turn that defense against them as evidence of a promissory misrepresentation (“But then you didn’t intend . . .”). And taking such testimony as proof positive of promissory fraud neglects the scienter requirement, since the promisor’s alternative, erroneous understanding of her promissory act may be a matter of mere negligent or even reasonable mistake, not deserving of full promissory-fraud liability.41 In Carbolic Smoke Ball, however, this use of the defendant’s testimony would be warranted, for Carbolic Smoke Ball’s proffered interpretation of its promise as a mere puff was on its face reckless. The assurance that the £1,000 was on deposit “to show our sincerity” was a clear signal that the offer was not mere puff. We should worry about deterring defendants from offering alternative reasonable interpretations of their promises, but not about chilling patently unreasonable defenses. Judge Posner, sitting in the district court, reached a similar conclusion in Price v. Highland Community Bank, holding that a defendant’s testimony “that he never intended to commit himself to set up the promised [employee] incentive-compensation program” was sufficient evidence of an intent not to perform to support a jury’s finding of promissory fraud.42 Posner suggested that the more plausible explanation of the defendant’s nonperformance was that he “intended to establish an incentive program . . . but that he later changed his mind because he was dissatisfied with the performance of the marketing staff.”43 The defendant, however, chose in the face of a clearly binding promise to argue that his statements were mere puff.44 Once the jury concluded that there was a contractual obligation, the defendant was deservedly hoisted by his own petard, since his admitted lack of intent was, given the clear meaning of his statements, at least reckless. While we think this outcome was correct, we would criticize both the fact that the jury was never asked to make an explicit scienter finding and Judge Posner’s apparent assumption that there was no reason to worry about using the defendant’s in-court testimony as to his intent.45 Between these two extremes—Carbolic Smoke Ball and Highland Community Bank, on the one hand, and Leonard v. Pepsico, on the other—there are cases in which there is found to be a legally enforceable promise that the

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promisor reasonably or negligently mistook for mere puff. In these cases, the scienter requirement is not met and no action for promissory fraud should lie, though the promisee might succeed on a claim for promissory misrepresentation. Because the defendant in such a case would have a colorable claim of mere puff, we would not want to deter her from making such a defense and would therefore not allow her in-court testimony that she meant only puff to be used as evidence of no initial intent to perform. The Statute of Frauds and Parol Evidence

One of the most litigated contexts in which allegations of insincere promising appear is where the Statute of Frauds or the parol evidence rule applies. The reason is obvious. Not only is promissory fraud one of the few mechanisms for securing punitive damages for breach, it is also a way to avoid the preclusive effect of these rules with regard to certain oral promises. And, we would argue, this is entirely correct. Promissory fraud is tailored to prevent the misuse of these rules as tools for deceit.46 A central concern in implementing these antifraud doctrines is that opportunistic promisors will manipulate them to dupe innocent promisees. A bad actor might orally promise many things that she intends never to perform precisely because she knows that the parol evidence rule or the Statute of Frauds will later render her promise a legal nullity: “It could go without saying that these rules are not meant to shield fraud, but they may well have just that effect if they prevent a party from showing that he has been deceived by an oral promise, made to induce reliance and action but without the slightest intention of keeping it.”47 The doctrine of promissory fraud addresses just such misuses. Opportunistic promisors are deterred by threatening them with punitive damages should their scheme be exposed.48 Of course there is the competing concern that opportunistic promisees will use an action for promissory fraud as a way of thwarting the antifraud goals of these rules.49 The inevitable tension between the need to prevent the promisor’s fraud and the need to prevent the promisee’s has led some to suggest splitting the difference. A few courts, for instance, allow evidence of fraudulent parol promises only if they don’t directly contradict the written agreement.50 Others have advocated limiting recovery—for example, to reliance rather than expectation damages and prohibiting punitive awards—in order to remove the incentive to make a false claim.51 We think it unnecessary to split the baby to achieve the proper incentives in these cases. That is, we would simply allow the use of parol evidence to prove ei-

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ther promissory fraud or promissory misrepresentation, even where such evidence could not be used to prove breach of contract, and allow successful claimants the full range of damages—including punitives—for either. First, the mere possibility of limited compensatory damages may not be enough to deter those who would misuse rules like the Statute of Frauds or the parol evidence rule as tools for deceit. Where wrongdoers think they are unlikely to be caught, only punitive damages will do. Second, opportunistic promisees can be thwarted by effective judicial monitoring of the sufficiency of the evidence. As we have emphasized throughout this book, the affirmative burden of establishing promissory misrepresentation is not a light one. That burden thus provides a natural safeguard against trumped-up contracts, especially when enhanced by prevailing procedural rules, such as the heightened pleading requirements for claims of fraud, raising the burden of proof to clear and convincing evidence, and the rule that the mere nonperformance of a contract does not warrant an inference of a wrongful initial intent. Finally, in order to qualify for full-blown punitive damages, a claimant must also show that the misrepresentation was made recklessly or knowingly. So long as the law of promissory fraud is structured to avoid false positives, it won’t pose a threat to the effective functioning of either the Statute of Frauds or the parol evidence rule. In Pinnacle Peak Developers v. TRW Investment Corp., then judge Sandra Day O’Connor foreshadowed her particularized constitutional jurisprudence on the Supreme Court when she advocated that courts balance the conflicting policies underlying, on the one hand, the Statute of Frauds and the parol evidence rule and, on the other, promissory fraud.52 After first noting that other states were “split widely on whether to permit parol evidence which contradicts a writing when fraud in the inducement is alleged,” she went on to emphasize the need for context sensitivity in determining whether a promissory-fraud action should lie despite the parol evidence rule: A case by case study of a large number of cases nationwide dealing with the application of the parol evidence rule . . . indicate[s] that, in practice, courts generally apply the parol evidence rule to exclude allegations of prior or contemporaneous oral promises which contradict the written agreement in cases involving “formal contracts” which were the result of negotiation between parties with some expertise and business sophistication. There is a much greater tendency in the reported cases to allow such evidence in “informal contracts” between people who lack sophistication in business. In cases involving abuse of the bargaining process, such as unconscionable contracts or contracts involving duress, the courts almost always disregard the parol evidence rule and allow evidence of the oral promises or representations. . . . The ap-

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plication of the parol evidence rule moves along a continuum based on the extent of the contradiction and the relative strength and sophistication of the parties and their negotiations. . . . There are circumstances under which evidence of a prior or contemporaneous contradictory oral representation or promise would be admissible notwithstanding the subsequent integrated written agreement of the parties.53

To our mind, Judge O’Connor’s reasoning is sound. Rather than a per se rule as to when parol evidence can prove fraud, courts should be sensitive to the content of the alleged representation (including “the extent of the contradiction”) and to the context of the promise (“the relative strength and sophistication of the parties”). We would emphasize, however, that these factors already play a central role in our approach to promissory fraud. We have argued that in the representation inquiry, where the goal is to ascertain the objective meaning of what was said, evidence of surrounding context—including both the sophistication of the parties and the structure of the deal as a whole—is essential. And proof that the promisee’s reliance was reasonable will also depend in large part on the relationship between the parties and the extent to which the alleged oral representation contradicts the written instrument. It is perfectly legitimate to worry that allowing promissory-fraud claims in all parol evidence contexts runs too great a risk of subjecting innocent promisors to liability. The answer to that worry, however, is not to balance competing policy concerns (a vague standard at best) but to insist on proof of all the elements of promissory fraud. Lack of Consideration

Promises that are unenforceable because of lack of consideration might appear to pose a more difficult question as to liability for promissory misrepresentation. It’s hard to imagine a promisor misusing the consideration requirement in the way that the Statute of Frauds or parol evidence rule can be converted into a tool for deceit. What’s the incentive for her to do so? A promisor who makes a gratuitous promise knowing that it cannot be enforced hasn’t gained anything thereby—she hasn’t been paid any consideration.54 But this is perhaps too narrow a view of what motivates promisors. As an example, recall the facts in Ricketts v. Scothorn.55 Ricketts had presented his granddaughter with a note promising her $2,000, so “that you will not have to work any more,” but died before performing his gratuitous promise. This left the granddaughter, who had quit her job in reliance, to bring an action against his estate for enforcement of the promise. Now suppose that Ricketts’s private letters indicated that he never intended to perform his promise—he was inten-

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tionally stringing his granddaughter along simply because he wanted her to quit the job. It seems to us that, at the very least, the granddaughter has been wronged and deserves to be made whole. And why not deter such bad-faith promises with punitive damages? The above example, however, is merely hypothetical, and we have been unable to find any cases where promissory-fraud liability lay in the absence of consideration. This suggests that there may be a de facto consideration defense, warranted or not. In fact Judge Posner has suggested that one of the reasons for Illinois’s hostility toward promissory fraud is a fear of “circumventing the limitation that the doctrine of consideration is supposed however ineptly to place on making all promises legally enforceable.”56 Whether one agrees with this approach will depend in part, of course, on what one thinks of the consideration requirement. We aren’t going to wade into that doctrinal swamp. We would reiterate, however, that with the proper procedural safeguards, promissory fraud does not threaten to create an action for breach where none existed before. Because a properly formulated and enforced law of promissory fraud sets a relatively high bar, one that most disappointed promisees have no hope of clearing, it poses no general threat to the doctrine of consideration. What it does do is support fair dealing and the reliable flow of information. On balance, we think that an action for promissory fraud should also lie although the promise lacks consideration—as a potential complement to promissory estoppel liability.57 Illusory Promises

An illusory promise is a statement that has the form of a promise but by its own terms does not put the promisor under any obligation. Our analytic distinction between not intending to perform and intending not to perform will help clarify just how an illusory promise can misrepresent the promisor’s intent. Once it is clear that such misrepresentations are possible, we shall see that illusory promises, though not binding qua promises, can support a claim of promissory misrepresentation. Consider for example the facts underlying Spooner v. Reserve Life Insurance.58 In this case the employer life-insurance company issued a bulletin to all of its agents entitled “Extra Earnings Agreements.” The bulletin stated, “[Y]ou will receive at the end of each 12 month period a bonus,” which was to be based on the percentage of policies agents were able to renew after lapse. But in a separate paragraph, the company also included the following term: “This renewal bonus is a voluntary contribution on the part of the Company. It is agreed by

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you and by us that it may be withheld, increased, decreased or discontinued, individually or collectively with or without actual notice.”59 A promise that needs to be performed only at the sole discretion of the promisor is illusory and undermines any contractual duty to perform. Unsurprisingly, the Washington Supreme Court rejected the employee’s breach-of-contract claim when the insurance company refused to pay the bonus. But what about liability for promissory fraud? It is true that an illusory promise like that in Spooner, by expressly giving the promisor the choice of not performing, opts out of the normal representation that she intends to perform. In our categories, illusory promises are opaque. But this is not to say that they are blank, for an illusory promise at least says that the promisor does not intend not to perform. It is therefore like the option and take-or-pay contracts discussed in chapter 2. Just as the developer who buys an option to purchase land should be held liable for misrepresentation if she initially intended not to purchase, so should the employer who dangles the possibility of a bonus intending that it will never be paid. In fact, the Spooner court, while ruling against the plaintiff-employee, observed that the defendant was “perilously near the perpetration of a fraud.”60 An illusory promise should give rise to a valid claim for promissory fraud if the promisee can show that at the time of promising the promisor affirmatively intended not to perform. TINALEA

Clauses

Our argument about illusory promises turns on the representation inquiry: What is it that an illusory promise says about promisor intent? We arrive at a very different result when we ask how to interpret agreements with tinalea (“This is not a legally enforceable agreement”) clauses. An illusory promise does not represent a simple intent to perform, because it expressly reserves the right not to do so. That is, an illusory promise expressly contemplates nonperformance. This is not true of an agreement with a tinalea clause. The point of the tinalea clause is not to reserve the right not to perform but to shield the promisor against an action for breach. And there are any number of reasons why a promisor might want to avoid potential breach-of-contract liability besides the fact that she wants to have the right not to perform. We therefore think that a tinalea clause alone is, in the normal case, not enough to opt out of the default representation of an intent to perform. Nor should it be enough to opt out of legal liability should that representation be false. While there are persuasive arguments for respecting tinalea clauses, so that parties can order their actions without fear of suits in contract,

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these nonenforceable agreements are still on their face meant to induce promisee reliance. And the fact that the parties opted out of contract damages does not mean that they meant also to opt out of this other form of liability, which has separate elements and is generally more difficult to establish. We have proposed mechanisms for avoiding liability for promissory misrepresentations— opaque and nonwarranting promises. Assuming these are recognized, courts should allow parties to an agreement to pick and choose the scope of potential liability. Where a promisee has suffered harm as the proximate result of his reasonable reliance on a tinalea promisor’s misrepresented intent, we see no reason not to allow recovery. tinalea clauses do, however, raise an important question about our proposed mandatory representational floor—that every promise says at least that the promisor does not intend not to perform, that is, that there are no blank promises. Our argument in chapter 5 was that where a promisee relies on a blank promise, what he is really counting on is the opportunity to recover damages for breach of contract, and that the same gains of trade could be realized at a lower social cost if the parties simply contracted for the anticipated damages award. But where there is a tinalea clause, the promisee cannot be relying on the opportunity to enforce the agreement in court. In such cases, it might be desirable to allow the parties to opt out also of all liability for promissory misrepresentation. That is, we might want courts to recognize the promisor’s denial that she is making any representation as to her intent (to acknowledge her blank promise) or to allow tinalea promisors expressly to opt out of all liability for any promissory misrepresentations with a tinaler (“This is not a legally enforceable representation”) clause. Illegal Promises, Promises against Public Policy, and Defensive Promises

When a contract contemplates behavior that violates on its face a mandatory substantive rule—for example, when it contemplates a criminal act—there is a stronger rationale for disallowing claims of promissory misrepresentation and fraud, since doing so gives a promisor the ability to bring the substantive violation to light. To take an extreme example, suppose two criminal coconspirators agree that neither will tell the police they are plotting to kill the president. It would be ludicrous to hold one of the conspirators liable for damages for making such a promise insincerely. Withholding promissory-fraud liability in such contexts destabilizes criminal cooperation by helping to ensure there is no honor among thieves.61

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We can imagine this rationale operating in less dramatic contexts as well— where the agreement is not illegal but is unenforceable as against public policy. Suppose a prospective renter points out that an apartment violates certain provisions of the housing code and the landlord offers to reduce the rent if she will sign anyway. This promise may be unenforceable under the mandatory warranty of habitability, which in many jurisdictions allows a tenant to withhold a portion of the rent due until such violations have been corrected.62 In this situation, it makes good sense to allow the renter to promise to pay rent and not report the violation, while secretly intending to exercise her legal right not to pay the rent and force the landlord to cure. Waiving the prospect of promissory-fraud liability reinforces the mandatory status of the rule, while enforcing promissory fraud would chill the productive effects of whistle-blowing. A potential application of this reasoning can be found in Galaznik v. Galaznik, in which a Texas appellate court reversed a jury finding of promissory fraud.63 The plaintiff had agreed in her divorce settlement not to seek child support from her ex-husband, the defendant, so long as he made payments of $300 per month. (The defendant, an accountant, had insisted on this provision for tax reasons.) A year later, the plaintiff became seriously ill and requested child support. The jury found that both plaintiff and defendant knew at the time the agreement was made that it was unenforceable as against public policy and found that the plaintiff intended to seek modifications when she signed it. Now an obvious criticism of the jury’s decision is that the plaintiff ’s illness is a changed circumstance that strongly suggests she changed her mind. We would argue, however, that even if the plaintiff had initially intended to seek modifications, she should not be held liable for promissory fraud. The mandatory rule that agreements not to seek child support are unenforceable is promoted by allowing persons to enter into such an agreement with the intention not to perform.64 A harder case presents itself where it is unclear whether the promisee knew about the substantive violation of the mandatory rule. Returning to the landlord-tenant context, imagine that only the prospective tenant—not the landlord—knows of a housing-code violation and that she enters into the lease intending to withhold her rent. Enforcing promissory fraud in such asymmetric contexts might induce the tenant instead to disclose the violation to the landlord before contracting. In such cases, promissory-fraud liability could work as a beneficial penalty default, forcing the more informed tenant to share what she knows with the landlord before contracting. But enforcing promissory fraud in asymmetric situations may also leave pre-

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contractual whistle-blowers unprotected. The apartment seeker who reveals her sophistication by pointing out that the apartment is not up to code will find it difficult to rent. On net, it seems that the prospective tenant with private information about a housing-code violation should be able to sign the lease without an intent to pay rent—that is, without risking liability for promissory fraud. The law should take a similar approach with regard to private information an employee has about the employee’s legally protected status. Imagine that during a job interview a prospective employer asks whether an applicant’s religious beliefs would prevent her from working on Saturdays. Federal regulations governing religious discrimination in the workplace state that such a question violates Title VII.65 We therefore think that the applicant who expects to exercise her right not to work on Saturdays for religious reasons should be allowed to misrepresent her intent without incurring liability for promissory fraud.66 Another example of an unenforceable contract where no action for promissory fraud should lie is the contract made under duress. When one side to a contract wrongfully tries to extort favorable terms, the other side can make a defensive promise that she intends not to perform without incurring liability for promissory fraud.67 The hostage negotiator does not commit a wrong when she insincerely promises the hostage taker that all his demands will be met if he will just let his captives go. The law countenances insincere promising in such a setting—as in all of the above examples of contracts against the public interest—to counteract the wrongful behavior of the promisee. As an empirical matter, defensive promissory misrepresentation most frequently occurs during attempts to modify existing agreements by threatening breach. A particularly rich source for thinking about promissory-fraud liability is the famous Alaska Packers’ Association v. Domenico, where there are not one but two possible promissory misrepresentations.68 In the first instance, there is the question of whether the fishermen—who shortly after arriving in Alaska collectively stopped work and demanded $100 each to complete the season—initially intended to perform their promises to work the season for between $50 and $60. The court found that they had refused to continue working “without any valid cause,”69 which might be an indication that, knowing that the employer had invested substantial sums in the salmon cannery and wouldn’t have recourse to the labor market, they intended from the beginning to extort a higher wage. But this may be attributing too great a degree of knowledge and concerted activity to the fishermen—who might have only hit on the idea after their arrival. For present purposes, the more interesting issue is whether the Alaska Pack-

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ers’ Association spoke sincerely when it capitulated to the employees’ wage demand. We have argued that a promisor acts culpably if she insincerely promises knowing that her promise is not legally enforceable by the operation of the Statute of Frauds or other formal rules. But in this situation we find that two wrongs make a right and valorize the making of a promise that the promisor knows will not be legally enforceable and intends not to perform. We therefore agree with the common-law judgment that the victim of extortion, duress, or some other wrongful threat should have the option of making a promise she intends not to perform. Of course this rule will only work against extortionists who are unaware of the rule itself. More savvy fishermen will know that the modified contract is not worth the paper it is written on and will demand to be paid the extra money in advance. Procreative and Political Promises

All of the above situations involving contracts against the public interest or duress share a basic rationale for suspending promissory-fraud liability: by doing so, we allow promisors to use promissory misrepresentations to prevent harms by bad promisees. This rationale does not apply to all agreements unenforceable for reasons of public policy. There is a category of transactions where the agreement itself does not implicate public-policy concerns or violate substantive rules, but its legal enforcement would be problematic. For instance, some procreative agreements are socially unobjectionable but legally unenforceable.70 These unenforceable agreements present a more difficult policy question, since the whistle-blower rationale for waiving promissory-fraud liability is not present and the promisee may be a real victim. Imagine for example that a woman promises her sexual partner that she will abort (or that she will not abort) if she gets pregnant and that this promise is a condition of her partner’s willingness to have sex. It is clear that the promise will not be specifically enforced and almost as clear that the breach itself will not create monetary liability. But what if the promisee can also prove that the promisor initially intended not to perform her promise? Should she be liable not for the breach but for her promissory misrepresentation? The promisor has acted wrongly. But there is the countervailing fear that imposing legal liability for her misrepresentation will indirectly influence the promisor’s ex post procreative choice, which is the reason the promise is unenforceable in the first place.71 We do not want to burden a woman’s choice whether or not to have a child by potential liability for promissory fraud or even negligent promissory misrepresentation.

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Election promises exhibit roughly the same characteristic. Clearly they are not enforceable as such. But what if they are made insincerely? Recall our question from chapter 1: When Vice President Bush said, “Read my lips: No new taxes,” did he know that the fiscal situation might well require new taxes and therefore misrepresent his intent (an undisclosed condition likely to occur)? And if he did misrepresent his intent, why shouldn’t he be held liable for that wrongful act?72 There are two aspects of these promises that together create the dilemma. One is the importance we attach to the ex post choice whether or not to perform. These are areas where we want actors to be able to make independent choices based on their own best interest or judgment—not on legal consequences. (Think also about the decision to donate an organ, to serve as a surrogate mother, or, some would say, to end one’s life if terminally ill.) Second, there is a significant delay between the promise and the time of performance, meaning that the promisor is more likely to have a change of heart. Thus a promise to use (or not to use) contraceptives that evening is less likely to raise issues of subsequent choice than a promise to abort and more likely to be the proper basis for liability if there was a promissory misrepresentation. That said, practical complexities preclude easy answers. Thus, in Wallis v. Smith, a New Mexico appellate court rejected a claim of fraud concerning contraception.73 The court held that even an allegation that the defendant intentionally misrepresented to the claimant that she was using birth control, and thereby misled the claimant into having sex, failed to state a claim. This decision may have been motivated by the fact that the father was suing for reimbursement of his child-support obligation. But while it is sound social policy to assure that child support is paid, there is a strong argument that when the mother has sufficient funds and has defrauded the father, the latter should be able to shift the burden of child support to her. There is in this situation no ex post choice to protect. But we are aware of no court that has entertained even the possibility of promissory-fraud liability in such circumstances.74 And while promissory-fraud liability looks good in theory, these cases may well reflect a completely correct recognition of social reality—including a common lack of perfect consent in sexual relations and economic imbalances. Now one way to prevent the burden on a woman’s or elected official’s ex post choice would be to allow the action for promissory fraud even in the absence of nonperformance.75 As we’ve noted, nonperformance is generally an element of promissory fraud, since proximate cause is an element of deceit and the proximate harms of a promissory misrepresentation are just those caused by the

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promisor’s nonperformance. But in cases where we are especially worried about protecting the ex post choice not to perform, we could decouple performance from promissory-fraud liability, in which case the promisor would not escape liability by changing her mind and performing. Indeed, one could imagine a rule that in certain cases the fact of nonperformance is inadmissible, so that the lack of intent or the intent not to perform must be established solely on the basis of other evidence. While this possibility is interesting in theory, we doubt that it would function in practice. Performance is so likely to prevent any action for promissory fraud that maintaining ex post freedom of choice requires that we simply exempt procreative and political promises from potential promissory-fraud liability.

SUCCESSFUL FORMATION

Formation cases—where the promisee’s most important reliance is that he binds himself to a legally enforceable contract—form the core of traditional promissory fraud jurisprudence. Since the preceding chapters have focused on just this sort of promissory misrepresentation, we limit ourselves here to observing how our proposed reforms might play out in some familiar contexts. One of our central theses has been that promissory fraud should apply not just to what a promise says about intent to perform but also to what it says about the probability of performance. Current law is underinclusive for not holding accountable promisors who intend to perform but have reason to believe that the objective likelihood of their performance is so low that it is not worthwhile for the promisee to consent to the contract. Consider, for example, the situation of Yale University students in 1984, when the university was subject to a ten-week strike by clerical and technical workers. Yale, which had a long history of strikes attending every contract negotiation, had good reason to expect that a strike would occur, since a new contract was to be negotiated that fall. It failed, however, to inform prospective students of the substantial risk of nonperformance. Imagine a student coming for a one-year masters degree who had declined an admissions offer elsewhere. While Yale probably wanted and intended to perform its educational promises, it simultaneously knew or should have known that the likelihood of its being able to do so was quite low. Given the implicit representation that it was likely to be able to provide full services to any attending student, Yale had a duty to disclose the possibility of the strike, or at least to disclaim any such representation, thereby putting the admitted student on notice that he might do well to investigate for himself.

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As a law student one of us helped organize a class action against Yale for breaching its promise to provide educational, dining, and dormitory services during the strike.76 In the light of our analysis in this book, it’s somewhat embarrassing that the complaint neglected to claim damages for failure to disclose the low probability of performance. That lawsuit, which in fact failed to make any promissory-fraud claim, exemplifies how an exclusive focus on intent can obscure more fundamental deceptions as to the probability of performance. Another twist on informational imbalances can be found in Vokes v. Arthur Murray.77 Here the defendant dance company had allegedly duped the plaintiff into purchasing fourteen dance courses, adding up to 2,302 hours of lessons, for a total cash outlay of more than $31,000. The plaintiff argued that the contracts were induced by “false representations . . . that she was improving in her dancing ability, that she had excellent potential, that she was responding to instructions in dancing grace, and that they were developing her into a beautiful dancer.”78 As the Florida appellate court recognized, this was an unusual case of informational imbalance: the promisor knew more about the contract’s value to the promisee (based on her potential as a dancer) than did the promisee herself. The trial court had dismissed for failure to state a claim, apparently on the theory that statements of opinion, prediction, or expectation are not actionable in fraud. We have no problem with the appellate court’s ruling that the plaintiff had stated a claim, based on the principle that “[a] statement of a party having superior knowledge may be regarded as a statement of fact although it would be considered as opinion if the parties were dealing on equal terms.”79 But we would also note another aspect of the case neglected by the appellate court: because of its experience in giving dance lessons, Arthur Murray probably knew that very few students ever end up attending two thousand hours of lessons. Here, then, we have the unusual case where the promisor has exclusive knowledge that it is unlikely to perform because it knows that the promisee is unlikely to request performance. While the basis of this informational imbalance is different, the consequences should be the same. Arthur Murray also committed fraud because its positive promise represented a certain likelihood of full performance, though it knew that the mutually understood condition of its full performance (the plaintiff’s wanting so many hours of instruction) was unlikely to be realized. Vokes suggests the possibility of a kind of inverse promissory fraud—where a promisor implicitly misrepresents the probability of the promisee’s wanting performance. Still other dimensions of promissory fraud at the time of formation can be found in the famous Peevyhouse v. Garland Coal.80 While Peevyhouse is gener-

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ally taught as a traditional breach-of-contract case, in fact the plaintiff alleged that the defendant strip-mining company never intended to perform its promise to reclaim the land.81 Though the defendant contested this claim, the possibility exemplifies the problem with blank promises.82 If the strip miner intended from the start to pay damages rather than performing, it would have been cheaper and more transparent simply to contract for the anticipated damages. And while we wouldn’t mind if the strip miner contracted for the option to reclaim or pay monetary compensation, our foregoing theory would insist that the promisee be informed that the company was not representing an intent to reclaim. The facts in Peevyhouse raise other issues as well. Let us assume that the strip miner intended at the time of contracting to perform or pay damages, depending on how costly performance turned out to be. If the promise was opaque, there was no promissory misrepresentation. But the promisee was probably still misinformed about how low damages would be—$300 in “diminution in value” damages, as opposed to the estimated $29,000 cost to perform the promise to remediate. As we discussed in chapter 2, a promisee’s participation constraint depends on any number of variables—not only on the probability of performance but also on, inter alia, the likely amount of damages. Peevyhouse illustrates a situation in which the promisor knows much more about the probable damages than does the promisee. Where such a promisor does not disclose that information, it is particularly unfair to read the promise as opaque—to allow the promisor also to withhold information about her intent.

POSTFORMATION

Postformation representations of intent to perform or predictions of performance are usually discussed under the rubric of “adequate assurances.” We examine such assurances from two angles: when they should give rise to liability for misrepresentation and when a promisee should have the right to demand them. Liability for Postformation Assurances

A postformation assurance that the promisor still intends to perform her original promise is too late to convince the promisee to sign the original agreement and thus doesn’t fit our basic model of promissory fraud. But as we argued in chapter 6, insincere postformation assurances can be evidence that the original promise itself was insincere. They can also trick the promisee into not filing suit

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or into continuing to perform his side of the bargain. Thus they can also perpetuate a new fraud. Both sorts of reliance are exemplified in F. D. Borkholder Co. v. Sandock.83 Here the plaintiff (Sandock) hired the defendant (Borkholder) to build an addition to his business. Sandock was unable to use the addition because Borkholder’s construction deviated from the architect’s plans and caused a recurring moisture problem. The court found that “Sandock made numerous complaints but was constantly reassured by several Borkholder representatives that the problem was caused by simple condensation, a theory ultimately disproved by an on-site test conducted by the Borkholder firm. Sam Sandock testified that Freeman Borkholder, president of the company, promised that the situation would be remedied whereupon Sandock tendered all but $1,000 of the contract price. The Borkholder people knew, of course, that the blocks in the wall were not filled with concrete.”84 That is, the defendant deliberately strung the plaintiff along, first by repeatedly asserting the moisture had another cause and then, once the breach was uncovered, by assuring him that it would be remedied. Given this evidence and the plaintiff’s clear detrimental reliance on Borkholder’s assurances (paying the contract price where he might otherwise have suspended performance and/or sued for breach), we have no problem with the court’s finding that the assurances themselves were false and fraudulent. Justice DeBruler, in dissent, argued that this was merely a case of repeated broken promises: “Defendant was confronted with the deviations and stated that he would correct them. Upon the representation plaintiff paid the major portion of the contract price reserving a minor portion as security for corrections. The corrections were not made. This evidence establishes no more than one, perhaps two, breaches of contract by defendant. There is nothing beyond the breaches upon which to predicate a finding of fraud.”85 But we would argue that the repetition of the assurances, followed each time by nonperformance, is strong evidence that the promisor was misrepresenting his intent. There was thus sufficient evidence that the assurances themselves were insincere. And it is possible to go even further. The trial record discloses that the defendant affirmatively concealed the existence of an initial breach, by suggesting that the moisture had an innocent cause. This misrepresentation, taken together with the unfulfilled assurances, suggests a scheme to defraud and might well be evidence of promissory fraud at the inception.86 Demanding Adequate Assurance

Both the Second Restatement and the Uniform Commercial Code provide that when a promisee has reasonable grounds for insecurity, he can demand ad-

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equate assurance of performance and, if the promisor does not provide such assurance, may cancel the contract.87 Courts and commentators have struggled with whether a promisor should ever be required to give additional consideration, such as a bond or letter of credit, to satisfy the adequate-assurance requirement.88 Our approach might obviate the need for such security in some cases. The promisor who verbally assures the promisee that she will in fact perform and then still breaches exposes herself to liability for postformation promissory fraud. And proof of postformation fraud is, by its very nature, less burdensome than proof of fraud at the inception. First, the representation of an intent to perform or that performance remains likely is now explicit, simplifying the representation inquiry. Second, as Borkholder illustrates, the fact that the promisee has grounds for demanding additional assurance means that the promisor already has at least approached breach, so a subsequent breach may well count as a repeated failure to perform. The threat of promissory-fraud liability, therefore, can give mere words of assurance sufficient legal bite. And this is all to the good. While it is unclear whether a promise is also an implicit agreement to post a performance bond when there are reasonable grounds for insecurity, it is certain that the recipient of a positive promise is owed the truth when the promisor assures him of her continued intent to perform.89 This last point raises an interesting question about adequate assurance: Should a promisor ever be required to give adequate assurance that goes beyond her initial promissory representation? Where a promisor initially represents an intent to perform, the promisee certainly has the right, should he later have reason for doubt, to demand reassurance that she still intends to do so. But what if the promise was opaque? Or what if there was an express-probability representation that performance was only 50 percent likely? On its face, it would seem that a promisor who doesn’t represent an intent to perform ab initio does not have a duty to assure the promisee of such an intent later on. That is, it seems that a promisee should be able to demand adequate assurance only of that which was represented in the original promise. On the other hand, the parties probably expected that, as the time of performance neared, the promisor would have more information about whether or not she would perform. The law-school applicant who has sent in a tuition deposit to her safety school will at some point know whether she has been accepted by her first choice. If this was the expectation going into the deal, then why not allow the promisee who has new reason to worry about nonperformance to demand of the promisor any newly acquired information about the probability of performance, or even impose on the promisor an affirmative duty to reveal any new information she acquires?

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The answer depends on the grounds for the adequate-assurance rule and would require a more fully articulated theory of the doctrine than we are inclined to attempt here. For the moment, we merely note why the question arises. To demand adequate assurance is essentially to demand that the promisor say something about the probability of performance. Once we see that, in most cases, the initial act of promising says something of the same sort, the obvious question is whether these representations are related. If we also allow promisors to opt out of certain promissory representations, we must then ask whether they shouldn’t also be allowed to opt out of the rule of adequate assurance and, if so, how.

CONCLUSION

Our purpose in this chapter has been to survey the landscape of promissory misrepresentation, not to draw general conclusions. And it turns out that the geography is so varied that all but the most vacuous generalizations would be untrue. In many contexts, the analysis of our earlier chapters—including the arguments for imposing legal liability and our recommendations as to how it should be done—goes through more or less unchanged. These contexts include nonpromissory representations of intent, nonpromissory predictions, and postpromissory assurances of performance. In other situations, the argument for promissory-fraud liability still has force, but the representation inquiry becomes more complex. Thus if a statement is mere puff, it says nothing about the promisor’s intent and should not give rise to an action for promissory fraud, even if the promisor initially intended not to perform. At the other end of the spectrum, a promise with a tinalea clause is still a promise and, as such, is subject to the positive default representation of an intent to perform. We would consider, however, allowing such a promisor to opt out of all promissory-fraud liability—including liability for the otherwise mandatory representation of no intent not to perform. Between these two extremes are precontractual representations and illusory promises, which typically represent only that the promisor does not intend not to perform. That is, we would regard such promiselike behavior as opaque, not positive. When it comes to other sorts of unenforceable promises, the appropriateness of liability for promissory misrepresentation depends on the rationale for unenforceability. Where a promise will not be enforced because of some formal defect—like noncompliance with the Statute of Frauds or lack of considera-

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tion—promissory-fraud liability should not be ruled out. In fact, permitting an action for promissory fraud prevents bad promisors from misusing these antifraud mechanisms as tools for deceit. Liability for promissory misrepresentations is not appropriate, however, in agreements that are unenforceable because they violate some substantive norm—because they contemplate something illegal or against public policy or because they are the result of duress or other bad acts in the formation. By forgoing promissory-fraud liability, we can undermine honor among thieves and encourage whistle-blowers. We should probably also suspend liability for promissory misrepresentations where an agreement is unenforceable not because of its substance but because legal enforcement itself is problematic. Thus in the case of political and procreative promises, where we have a strong interest in protecting promisors’ ex post choice not to perform, there should be no liability for an initial intent not to do so. Finally, it is useful to mention that the UCC expressly limits the use of promissory fraud claims to end run the procedural requirements imposed on a seller trying to reclaim its goods from an insolvent buyer. UCC § 2-702(2) provides in part, “Except as provided in this subsection the seller may not base a right to reclaim goods on the buyer’s fraudulent or innocent misrepresentation of solvency or of intent to pay.” There is a clear consensus that a seller cannot use a promissory fraud claim as an independent, nonstatutory basis for an action seeking reclamation. But, absent court error, promissory fraud remains alive and well for sale-of-goods sellers with regard to actions seeking nonequitable remedies, such as compensatory and punitive damages.

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Chapter 8 False Promise:

Insincere Promising as Crime

Promising something that you intend not to do is not just a tort, subject to punitive damages, but can also be a crime. The Model Penal Code’s definition of “theft by deception” expressly contemplates insincere promising, and the definitions of federal mail and wire fraud include prohibitions against “obtaining money or property by means of false or fraudulent . . . promises.”1 We refer to the criminal offense of promissory misrepresentation as false promise. Why, in addition to the civil actions for promissory misrepresentation and promissory fraud, there should be a crime of false promise is a question we don’t consider in any depth. We have no answers other than the familiar generalities—that criminal penalties are necessary to deter otherwise judgment-proof wrongdoers, to address cases in which compensation is impossible, to express society’s disapprobation, and so on.2 Nor do we address how criminal and civil sanctions might intersect in particular cases—for example, whether successful criminal prosecution should preclude a subsequent award of punitive damages.3 We take instead an empirical approach to the crime, examining its history and how it is currently enforced. While we don’t have 170

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a beef with criminalization in theory, our research indicates some significant problems with the way that the crime has been enforced. These include insufficient judicial attention to evidentiary requirements and overreaching statutory presumptions that certain breaches are alone enough to prove initial intent. In addition, past uses of the crime as a tool of subjugation recommend that we be alert to its possible misuse today. Based in part on these criticisms, we recommend a relatively narrow crime of false promise. Using the categories developed in chapter 2, we recommend requiring proof that the defendant affirmatively intended not to perform— which is a higher bar than proof of no intent to perform (since no intent is compatible with, for example, a conditional or an irrelevant intention). We are also sympathetic with the move in some jurisdictions to raise the burden of proof above “beyond a reasonable doubt” to “excluding to a moral certainty every [contrary] hypothesis”4 and argue that at the very least there should be greater judicial oversight of the sufficiency of the evidence. We examine a close analogue to false promise, the crime of passing bad checks, and apply some of the analytic results from earlier chapters to recommend improvements. Finally, we discuss the largely historical crime of seduction, where we find that defendants with an initial intent to perform were often convicted despite a legal definition that should have resulted otherwise.

THE EMERGENCE OF THE CRIME OF FALSE PROMISE

The traditional common-law rule in both criminal and civil cases was that a promisor could not be held liable for an insincere promise. In the criminal context, this rule endured until well into this century—in some states until today. Before jumping into an analysis of the contemporary crime and its enforcement, we briefly survey its history in the United States and identify some of the arguments in the air around the time of criminalization. The Criminalization of Insincere Promising in the United States

The criminalization of insincere promising in the United States was both a judicial and a legislative achievement.5 States used one of three methods to reject the traditional rule against prosecution for insincere promises: judicial holdings that an insincere promise was a falsehood like any other, judicial manipulation of legal categories to punish patently fraudulent behavior without ex-

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pressly rejecting the old rule, and, as has been the trend since the introduction of the Model Penal Code, legislative action. The rule against criminal prosecution for insincere promising remained unarticulated until the statutory codification of “theft by false pretenses” in a 1757 act of Parliament.6 False pretenses, which criminalized obtaining title by deceptive means, filled the gap left by the common-law crime of larceny, which captured the cheat who fraudulently obtained possession of and converted another’s property but excluded the one who fraudulently acquired title. In an 1821 case, Rex v. Goodhall, the English courts read the 1757 statute to exclude insincere promising, on the theory that its application was limited to misrepresentations of past or existing fact.7 Though a jury had found that the defendant obtained meat by making a promise to pay that he never intended to keep, the judges reversed the conviction, finding that the misrepresentation “was merely a promise of future conduct, and common prudence and caution would have prevented any injury arising from it.”8 The Goodhall approach made its way into American jurisprudence through an 1837 Massachusetts case, Commonwealth v. Drew.9 Relying heavily on Goodhall, the state’s Supreme Judicial Court held that the defendant, who had overdrawn his bank account, could not be convicted under the false-pretense statutes. “The pretense must relate to past events. Any representation or assurance in relation to a future transaction, may be a promise or covenant or warranty, but cannot amount to a statutory false pretense.”10 Though scholars and judges have questioned the legal accuracy and precedential weight of Goodhall and Drew,11 the influential first edition of Wharton’s American Criminal Law, which appeared in 1846, adopted the proposition, citing only those two cases.12 From these three sources, the limiting interpretation of theft by false pretenses quickly spread to nearly all states.13 The earliest rejection of the Goodhall view came from the federal judiciary’s construction of the federal mail-fraud statute, which was first enacted in 1872. Congress had eschewed the traditional “false pretense” language and instead criminalized the use of the mails in furtherance of “any scheme or artifice to defraud.”14 In an 1896 case, Durland v. United States, the Supreme Court addressed whether the extension of that term included false promise.15 Durland had been convicted of offering bonds with the promise they would be redeemed at good prices, though he in fact did not intend to redeem them at all. The Supreme Court rejected his argument that his failure to make good on his promise was merely breach of contract, not theft by false pretenses, reasoning that a scheme or artifice to defraud “includes everything designed to defraud by

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representations as to the past or present, or suggestions or promises as to the future.”16 In support of this, the court cited the broad wording of the statute17 and its belief that the evil sought to be remedied by the statute was all fraudulent behavior, including fraudulent promises.18 Congress ratified this interpretation in 1909 by amending the mail-fraud statute to include “false or fraudulent . . . promises.”19 While the Durland court distinguished “scheme or artifice to defraud” from “false pretenses” and therefore did not expressly reject the traditional view, the case established that the doctrinal limitation was not simply a matter of logic and opened the door to reinterpretations of traditional statutes.20 Though the federal criminalization of false promise occurred at the end of the nineteenth century, it is not until well into the twentieth that we find criminalization in the states. The first state high court to hold expressly that a defendant could be criminally prosecuted for an insincere promise was Rhode Island’s, which in 1928 reasoned that a promise represents a current intention to perform and that the existence vel non of such an intention is a present fact.21 During roughly the same period, we find lower Massachusetts courts applying the Edgington reasoning to uphold convictions,22 though it was not until 1950 that the Massachusetts Supreme Judicial Court unequivocally rejected the traditional rule.23 Around the same time that the Massachusetts high court acted, there appeared two influential opinions from the D.C. Circuit and the California Supreme Court arguing for broad criminalization: Judge Henry Edgerton’s 1946 dissent in Chaplin v. United States 24 and Justice Roger Traynor’s 1954 majority opinion in People v. Ashley,25 both of which we discuss below. While the Rhode Island, Massachusetts, and California high courts simply rejected the traditional exclusion of insincere promises, judges in other jurisdictions took a more indirect route, securing convictions by instead manipulating the traditional distinction between the common-law crime of larceny by trick (where the victim has been convinced to depart with possession, but not title) and the statutory crime of false pretense (where the victim has been persuaded to transfer title). Because Goodhall and the cases that followed applied only to false pretenses, it was widely understood that insincere promising could still be prosecuted if it constituted larceny by trick—that is, if title hadn’t passed.26 Consequently, a conviction could be sustained by pushing it out of the one box and into the other. A 1902 New York Court of Appeals case, People v. Miller, exemplifies the technique.27 Miller had promised, in exchange for seed money, huge speculative profits on the stock market, failed to make any substantial investments, and then promptly ran off with most of the funds when the scheme was ex-

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posed. The intermediate appellate court overturned his conviction for larceny by trick, reasoning that Miller had acquired title interest in the funds and thus was guilty of false pretense or nothing, and that the Goodhall rule therefore barred conviction.28 On appeal, New York’s highest court avoided this result by holding that victims did not intend “to vest [defendant] with title, but with custody only, and that for a specific purpose,”29 from which it concluded that the crime was larceny by trick and the conviction for the false promises sustainable. As one scholar has pointed out, the reasoning in this case is dubious at best, since it’s hard to fathom how investors would have expected Miller to buy stocks with their contributions unless he had full title.30 The explanation, of course, is the New York court’s agreement with the Durland observation that false promises are effective means of perpetrating frauds and that a rigid line between larceny and false pretenses would leave the statutes largely impotent against knowledgeable swindlers. Interestingly, the New York Court of Appeals itself put a stop to such recategorization in 1948, when it considered a 1942 amendment that merged larceny and false pretense by expanding the definition of the former to include instances in which the accused acquired title.31 Rather than allowing prosecution for false promise under the more expansive definition, the court held that the legislature intended only to eliminate the larceny/false-pretense distinction, not to extend criminal liability to behavior formerly allowed. It was then not until 1965 that the New York legislature finally acted to allow prosecutions by expressly including theft by false promises in the definition of larceny.32 Though Congress expressly criminalized false promise in its 1909 amendment to the federal mail-fraud statute and state courts were finding ways to do so from at least around the same time, it was more than three decades before state legislatures began to follow suit with general statutes.33 Louisiana was the first to do so when it adopted its new criminal code in 1942.34 Finding that “it is socially wrong to take the property of another, in any fashion whatsoever,”35 the legislature abolished the distinctions among larceny, embezzlement, and obtaining by false pretenses. As interpreted by the Louisiana Supreme Court, this change sought to proscribe all “fraudulent conduct, practices or representations,” including false promises.36 Nebraska was the first state to enact legislation that expressly repudiated the Goodhall rule. This happened in 1947, after the outrage caused by Hameyer v. State.37 Hameyer involved a con artist who persuaded his victims to give him thousands of dollars to procure an oil and gas lease with promises that they could then sell the leases, in three months’ time, for a windfall profit. The trial

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court followed the traditional rule and threw out two counts of the indictment because they were based solely on false promises, a ruling eventually upheld by the state’s highest court. This caused the legislature to broaden the false-pretense statute to include those who obtained another’s property “by a promissory representation as to some future action to be taken by the person making the representation where made with the present intent that such future action would not be performed.”38 Some state legislatures followed Nebraska’s lead by passing statutes in the 1950s that expressly criminalized false promise.39 Many, however, didn’t act until after the 1962 approval of the final version of the Model Penal Code, which consolidated the various kinds of theft and added a definition of “theft by deception” that expressly included theft by false promises: “A person is guilty of theft if he purposely obtains property of another by deception. A person deceives if he purposely . . . creates or reinforces a false impression, including false impressions as to law, value, intention or other state of mind; but deception as to a person’s intention to perform a promise shall not be inferred from the fact alone that he did not subsequently perform the promise.”40 Some states, such as Pennsylvania in 1972, simply adopted the language of the Model Penal Code.41 Others did not adopt the exact language but were clearly motivated by the Model Penal Code to criminalize theft by false promise.42 Thus the Iowa legislature in 1976 revised its definition of “theft by deception” to include “[p]romising payment, the delivery of goods, or other performance which the actor does not intend to perform or knows that the actor will not be able to perform,”43 a change that the Iowa Supreme Court attributed to the influence of the Model Penal Code.44 In the two decades after the adoption of the Model Penal Code, a great number of state legislatures passed laws criminalizing false promise.45 As of the writing of this book, forty-five states and the District of Columbia have criminalized theft by false promise through express legislation or judicial reinterpretation of earlier false-pretense statutes.46 And a number of states also have statutes targeting specific types of insincere promising, like retail sales and home repair.47 Nonetheless, a small number have retained the crime of false pretenses and continue to interpret it to exclude promissory misrepresentations.48 The Debate over Criminalization: Chaplin and Ashley

Having surveyed the timing and manner of criminalization, we now turn to the debate itself. The majority and dissenting opinions of two influential cases— the 1946 D.C. Court of Appeals case of Chaplin v. United States 49 and the 1954

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California Supreme Court case of People v. Ashley 50 —nicely express the arguments on each side. Chaplin concerned defendants who had obtained money from the victim after promising to use it to buy liquor stamps for their business and later to repay it. The question on appeal was “whether the ‘present intention’ of the defendants not to return the money and not to buy the stamps as they said they would relates to a ‘present or past existing fact’ such as will support a conviction for the crime of false pretenses.”51 The Chaplin majority followed Goodhall and answered in the negative. In Ashley, the defendant had scammed two elderly women of their life savings with a fraudulent scheme to establish a theater, raising the question of whether California’s consolidated theft statute captured theft by false promise. The California high court held that the defendant could be held criminally liable for his insincere promises. Both cases contain vigorous dissenting opinions, pushing both sides in the debate beyond doctrinal reasoning and toward an examination of the policy implications of the decision.52 The traditionalists—that is, the Chaplin majority and Schauer’s separate opinion in Ashley—put forward three lines of argument against criminalization: victim self-help, the danger of convicting the innocent, and, relatedly, the chilling of economic activity. We find the victim self-help rationale in the Chaplin majority opinion, which quoted Rex v. Goodhall for the proposition that “[i]t was merely a promise for future conduct, and common prudence and caution would have prevented any injury arising from the breach of it.”53 On this argument, insincere promising need not be criminalized, because the victim’s own imprudence is to blame for the injury. Edgerton in dissent conceded that a savvier victim could have avoided the injury, but he rejected the majority’s “blame the victim” rationale as antiquated: “In 1821 the fact that ‘common prudence and caution would have prevented any injury’ seemed to an English court a good reason for refusing to penalize an injury which had been intentionally inflicted by a false promise. The fact that common agility in dodging an intentional blow would have prevented any injury would not have seemed a reason for refusing to penalize a battery. Fools were fair game though cripples were not. But in modern times, no one not talking law would be likely to deny that society should protect mental as well as physical helplessness against intentional injuries.”54 This response can be strengthened if we add Jonathan Swift’s observation in Gulliver’s Travels that it is difficult even for the prudent person to defend against fraud. Swift attributes the argument to the Lilliputians: “They look upon fraud as a greater crime than theft, and therefore seldom fail to punish it with death; for they allege, that care

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and vigilance, with a very common understanding, may preserve a man’s goods from thieves, but honesty has no defense against superior cunning; and, since it is necessary that there should be a perpetual intercourse of buying and selling, and dealing upon credit, where fraud is permitted and connived at, or has no law to punish it, the honest dealer is always undone, and the knave gets the advantage.”55 To put Swift’s point in contemporary law-and-economics terms, relying on promisee precaution is often going to be massively inefficient compared to relying on the threat of legal sanction against the insincere promisor. The second and third policy rationales offered by the traditionalists in both Chaplin and Ashley are more deserving: Divining a promisor’s true intent is a very difficult task and one fraught with error; criminalizing insincere promising is therefore likely both to subject innocent breachers to criminal sanctions and to chill valuable economic activity. Thus Schauer in Ashley emphasized the difficulty in proving the “purely subjective” nature of the facts in question. It is not, like the specific intent in such a crime as burglary, a mere element of the crime; it is, in any significant sense, all of the crime. The proof will necessarily be of objective acts, entirely legal in themselves, from which inferences as to the ultimate illegal subjective fact will be drawn. But, whereas in burglary the proof of the subjective element is normally as strong and reliable as the proof of any objective element, in this type of activity the proof of such vital element can almost never be reliable; it must inevitably (in the absence of confession or something tantamount thereto) depend on inferences drawn by creditors, prosecutors, jurors, and judges from facts and circumstances which by reason of their nature cannot possibly exclude innocence with any certainty, and which can point to guilt only when construed and interpreted by the creditor, prosecutor or trier of fact adversely to the person charged.56

Criminalization thus “cuts the heart out of a pertinent safeguard which the accumulated wisdom of at least two centuries has found to be necessary to prevent the conviction of the innocent who have met with commercial misfortune.”57 All of which is undesirable not only because of the effect on the innocently convicted but also because of an inevitable chilling effect on economic activity in general. As the Chaplin majority put it, “Business affairs would be materially encumbered by the ever present threat that a debtor might be subjected to criminal penalties if the prosecutor and jury were of the view that at the time of borrowing he was mentally a cheat.”58 We take these to be serious objections to the crime of false promise, just as we took them to be serious objections to the tort of promissory fraud. In fact, we believe there have come to be too many convictions for the crime, convictions where the record does not establish all of its elements with sufficient certainty.

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But we don’t accept the proposition that sufficient certainty is never available. Abstracting from the context and content of promises and their performance, it can look impossible to establish something so private and ephemeral as an intent not to perform. But when we look at the cases, we find many convictions where there was more than enough evidence of the promisor’s initial intent. As we described in chapter 6, this can include the fact that the promisor knew it would be impossible to perform, repeated broken promises of the same sort, and a pattern of deceptions and other actions demonstrating a preconceived scheme to defraud. Just this response is forcefully advanced by Edgerton’s dissent in Chaplin and Traynor’s majority opinion in Ashley. As Edgerton points out, inferring an intent not to perform is not inherently more difficult than proving “an intent to monopolize, to commit a felony, or to receive goods knowing them to be stolen.”59 Traynor goes beyond this to argue that with proper judicial oversight, the difficulty in proving intent will in fact protect the innocent and limit any chilling effect: “‘Ordinary commercial defaults’ will not be the subject of criminal prosecution, for the essence of the offense of obtaining property by false pretenses is (as it has always been) the fraudulent intent of the defendant. This intent must be proved by the prosecution; a showing of nonperformance of a promise or falsity of a representation will not suffice.”60 The argument for the traditional approach, on the other hand, presupposes “that trial juries are incapable of weighing the evidence” and “that appellate courts will be derelict in discharging their duty to ascertain that there is sufficient evidence to support a conviction.”61 Probably the best argument for criminalization, however, is the real culpability of certain forms of insincere promising. As Traynor argued, “If false promises were not false pretenses, the legally sophisticated, without fear of punishment, could perpetrate on the unwary fraudulent schemes like that divulged by the record in this case.”62 These answers correspond to our approach. While the criminalization of innocent breach is a legitimate concern, instead of decriminalizing this truly antisocial conduct, the law should tailor the elements of the crime and establish heightened standards of proof that will limit prosecution to egregious cases.

THE CONTEMPORARY CRIME OF FALSE PROMISE

As we’ve already discussed, this hoary interpretive dispute, so pressing in 1946 and 1954, about whether the statutory phrases false pretense and theft included

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a misrepresented intent to perform one’s promise, has been largely obliterated by modern legislation that expressly includes within the definition of criminal fraud the concept of promissory misrepresentation. Because the debate has been largely resolved in favor of criminalization, we can now empirically investigate whether the traditionalists’ fears of rampant criminal liability were well founded. A tour through the cases reveals numerous meritorious convictions. First and foremost among these are cases in which the defendant clearly knew at the time of promising that performance would be impossible. In State v. Vigil, for example, the defendant and his wife made three separate agreements to give up a single child for adoption to three different couples, promises that exhibited either Solomonic indifference to the well-being of the child or a clear intention not to perform.63 In Johnson v. State, the defendant accepted $1,500 to get the payor’s daughter out of prison within two weeks, even though he knew that the daughter had been in jail for a decade for double murder and that clemency could not be granted in so short a time.64 Criminal guilt is often also straightforward where there was a succession of unexplained broken promises or a pattern of deception. Thus, in People v. Docherty, the defendant applied for a business license using a false address and the number of an answering service and then, over the course of the next two weeks, contracted numerous homeowners to apply what he represented to be navy surplus roofing materials but was in fact a mixture of asphalt, aluminum paste, and gasoline that curled up and rolled off the roofs several days later.65 In People v. Catruna, the defendant borrowed $25,000 from an illiterate security guard, promising to use it to relocate an existing warehouse and to make the victim the chief of security, though the evidence showed that no warehouse existed, that the defendant never made any attempt to secure a property and was in no financial condition to undertake the venture, that he lied about his credentials and the terms of the loan, and that he had twice previously borrowed money using the same scheme.66 And as a final example, can we really doubt the insincerity of the owner of the Georgia crematorium who, it was recently revealed, breached more than three hundred promises to cremate?67 Such egregious fact patterns are enough to answer the criticism that an initial intent not to perform cannot be proven with sufficient certainty. But while we find many cases of meritorious prosecution and conviction, we are troubled by some aspects of current practice. On the level of theory, we find insufficient attention to formulating the elements of the crime, and specifically to the sort of intent that should support conviction. Looking at the practice of

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prosecution, we find a sometimes alarming confusion as to what counts as sufficient evidence of a defendant’s initial intent. Finally, the history of the crime suggests that we should be wary of its potential as a tool for subjugating disfavored groups. The Proper Bounds of the Crime

One of the primary theses of this book is that there is more than one way that a promise can be insincere. In earlier chapters, we made much of the difference between showing that a promisor affirmatively intended not to perform and showing only that she did not intend to perform. The latter can describe promisors who intend to perform or pay damages, who intend to perform only if some undisclosed condition is met, or who simply have no intention with respect to performance because they have misunderstood the meaning of their promises. We have also argued that a promise can say more than that the promisor intends to perform—that it can say, for instance, that performance is so likely that the promisee can reasonably rely on it. While statutes criminalizing false promise don’t explicitly recognize these distinctions,68 we find as an empirical matter that criminal prosecution is generally limited to cases where it is alleged that the promisor affirmatively intended not to perform. That is, we don’t find prosecutions for a mere lack of intent, low probability of performance, or a belief that it was not in the best interest of the promisee to rely. We think this is entirely correct.69 Our reasons for so limiting criminal liability are based not on categorical truths about different sorts of insincere promises but on two prophylactic rules of thumb, one concerning degrees of certainty and the other degrees of culpability. We have recommended a mandatory interpretive rule that, we believe, conforms to the minimum everyday meaning of the act of promising: a promise necessarily says at least that the promisor does not intend not to perform. Proof that this minimal representation is false involves evidence about what the defendant knew about the chances of her performance (her insolvency, her inability to perform in the past, and so forth), the application of the doctrine of chances (a string of similar failures to perform that can only be explained by an intention not to perform), or evidence of a plan or scheme to deceive (additional deceptions). While such evidence is hard to come by, it is fairly trustworthy when present—as illustrated by the examples at the beginning of this section. And where there is proof of an affirmative intent not to perform, there is also proof of scienter—that the promisor understood what she was saying and meant to do otherwise.70 Consequently, where there is evidence of an affirma-

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tive intent not to perform, that evidence is likely to provide a high degree of certainty of criminal culpability. Where such evidence of bad intent is lacking, proof of promissory misrepresentation is likely to be less certain. This follows in part from the requirements of the representation inquiry and our observation that some promises may not say more than the minimal representation. Absent proof of an intent not to perform, proof that the promise was false depends on showing that it was information rich—that it said that the promisor intended to perform, that it was in the best interest of the promisee to rely, or that the probability of performance was at least M. We have recommended an interpretive default in civil cases: absent evidence to the contrary, a promise says both that the promisor intends to perform and that she doesn’t believe it is not in the promisee’s interest to rely. Such defaults are, however, inappropriate in the criminal context, where the burden is on the state to overcome the presumption of innocence. And with or without the default, once we leave the realm of mandatory interpretations, the representation question provides another opportunity for error. We worry about threatening with criminal liability promisors in industries where a promise does not represent an intention to perform or those who have expressly opted out of the positive default. Uncertainty is magnified by the character of the veracity and scienter inquiries where there is no proof of an affirmative intent not to perform. We have argued that civil liability can be appropriate where there is evidence that the objective probability of performance was less than represented—regardless of the promisor’s intentions with respect to performance. But we doubt that, as a general matter, proof of the probability of performance is as reliable as proof of an intention not to perform. And where it is not clear that the promisor intended not to perform, there must be separate proof of scienter—that the promisor knew that her promise was saying something false or that she recklessly disregarded its truth. This is yet another opportunity for fact-finder error. None of this is to say that there can never be sufficient evidence that a warranting, definite-probability, or even opaque promissory misrepresentation was fraudulent, even if the prosecution doesn’t show that the promisor intended not to perform. But there is more room for error, and it is better to prophylactically limit criminal liability to cases where it can be shown that the promisor actually intended not to perform. Moreover, such a rule reflects something important about different degrees of culpability, which may be why we find that prosecutions already largely conform to it. It is simply worse to make a promise that one affirmatively intends

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not to perform. Again, this is no more than a rule of thumb. There certainly are cases where an undisclosed eventuality is so unlikely to occur that it is unconscionable for the promisor not to inform the promisee that it is in fact a condition of her performance, or where the promisee’s reliance costs are so high that the promisor who believes it is not in the promisee’s interest to rely has a clear duty to inform him of that fact. But under our proposed regime, such a promisor could still be civilly liable for specific-performance or punitive damages. And we think the costs of exempting such bad promisors from criminal liability are worth the benefits of shielding relatively innocent promisors from prosecution. Common Evidentiary Errors in the Prosecution of False Promise

The second deficiency we find in the contemporary crime of false promise concerns not its definition but its application. Not enough attention is paid to the probative value of different sorts of evidence. While a defendant’s knowledge of impossibility, repeated breaches, and a pattern of deception are all sufficiently dependable, we are troubled by courts’ reliance in criminal cases on no more than a short time between promise and breach or a lack of changed circumstances and by a common refusal to recognize the relevance of partial performance. We argued in chapter 6 that a lack of changed circumstances and, for similar reasons, a short time between promise and breach can each be evidence of an initial intent not to perform. While both are proper evidence to use in the civil context, we worry that they are occasionally overvalued in criminal prosecutions. Take for example a specialized provision of the D.C. criminal code: “In cases in which the theft of property is in the form of services, proof that a person obtained services that he or she knew or had reason to believe were available to him or her only for compensation and that he or she departed from the place where the services were obtained knowing or having reason to believe that no payment had been made for the services rendered in circumstances where payment is ordinarily made immediately upon the rendering of the services or prior to departure from the place where the services are obtained, shall be prima facie evidence that the person had committed the offense of theft.”71 This is obviously meant to addresses shoplifters or the restaurant patron who eats her meal and then takes off without paying. And such a prima facie evidentiary rule is warranted in the civil context, since often enough the defendant never intended to pay. But it is problematic to take a simple failure to pay as sufficient

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for a criminal conviction. The case in Victor/Victoria was stronger because we know (and a prosecutor might have proven) that Julie Andrews did not have the means to pay and that she had an elaborate cockroach-based scheme to avoid doing so. But clearly a patron who intended to pay might absentmindedly walk out without signing her credit-card receipt. (We have!) Courts should demand more than a short time between promise and breach or lack of changed circumstances. Even more troubling are cases where a defendant made substantial efforts at performing or in preparation to perform and is nonetheless found guilty of theft by deception. We are skeptical that proof beyond a reasonable doubt of the defendant’s initial intent not to perform exists in many of these cases, since the defendant’s sincere efforts at performance are inconsistent with such an intention. Why would an unsophisticated defendant waste her effort in preparing for performance she meant not to complete? Consider, for example, Kimble v. State, which upheld the defendant’s conviction for three counts of theft by deception for promising certain home construction that he allegedly knew would not be performed.72 The conviction was despite the defendant’s substantial performance of all three promises. On the first contract, he had spent two days on-site, clearing the lot on which he was to build the house and digging trenches. He also partially performed on the second, removing bricks, laying foundation, and preforming the back of the house and the bottom rafters and studs. On the third contract, he removed the brick and dug out footing but claimed he could not finish because his helpers walked off the site after he could no longer pay them. While multiple breaches can be evidence of a knowing promissory misrepresentation, it is not always dispositive. Here the contractor’s partial performance weighs heavily on the other side of the scale, suggesting that he simply changed his mind when something better came along or ran into unforeseen obstacles.73 The relevance of partial performance, as well as its complexities and the importance of proving mens rea, is also shown by Kollar v. State, where the court upheld the conviction of a defendant who owned a coin shop and ran a special deal: if a buyer purchased precious metals from him and allowed him to keep the metal on-site, Kollar would pay the purchaser 1 percent of its value each month.74 One expert witness likened the 1 percent plan to a pyramid scheme, which inevitably would, and eventually did, collapse. Like all pyramid schemes, the facts in Kollar mix together partial performance, repetitive breach, and possible knowledge that performance was impossible. The majority appropriately emphasized repetition in upholding the defendant’s conviction: “The record

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shows that Kollar repeatedly accepted money from purchasers, promised delivery of goods within short periods of time, then lulled purchasers with excuses why delivery was not had and made fractional delivery of purchases. This pattern began prior to Kollar’s initial financial reversals and continued well after he should have been aware that his business was failing.”75 But partial performance complicates matters. The dissent argued that with respect to at least some customers there was no evidence that Kollar knew he would not perform. And in one case, he paid the 1 percent interest until the time his business went under.76 Moreover, the series of breaches happened not over time but all at once, weakening the inference that Kollar wouldn’t perform under any possible circumstances. Of course, one of the reasons for partial performance in a pyramid scheme is to induce more victims to come forward before it crashes. But the presumed knowledge that the pyramid must collapse is doing a lot of work in establishing the defendant’s culpability. This raises the question of just how obvious the structural impossibility was in Kollar. This is not a situation like The Producers, in which Max Bialystock sold more than 1,000 percent of the interest in a musical. The defendant might have been thinking more along the lines of Jimmy Stewart’s speech to his panicking depositors in It’s a Wonderful Life. Banks are structured to loan money in a way that prevents them from satisfying all the demands of depositors at once, but we don’t think of banks as pyramid schemes. (Airlines have also been known to overbook their flights without incurring criminal liability.) It might well be that Kollar found it easier to sell his product with other customers’ purchases in his showroom, and the extra sales would have paid for at least some return to the depositors.77 Thus the dissent argued that “[t]he one percent plan was only a part of Kollar’s business.”78 We are not sure whether Kollar’s conviction was clearly erroneous, but it is another example of how partial performance complicates our intuitions about false promise. There are, of course, situations in which a pattern of partial performing is evidence that the defendant intended not to perform any of the promises—like classic pyramid schemes or cases where partial performance was clearly used to string customers along as part of a scheme to defraud. It would therefore be wrong to treat partial performance as a per se defense, either in the civil or in the criminal context. It would also be wrong because of the danger of creating safe harbors for real fraud—of giving insincere promisors a reason to do just enough to avoid the punitive sanction. But neither should courts overlook its probative value where there isn’t other clear evidence that the defendant intended not to perform.

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We have throughout this book recommended greater judicial attention to and monitoring of the sufficiency of the evidence of insincere promising. In the criminal context, we might go even further. New York’s larceny statute raises the burden of proof for allegations of promissory misrepresentation: “In any prosecution for larceny based on false promise, the defendant’s intention or belief that a promise would not be performed may not be established by or inferred from the fact alone that such promise was not performed. Such a finding may be based only upon evidence establishing that the facts and circumstances of the case are wholly consistent with guilty intent or belief and wholly inconsistent with innocent intent or belief, and excluding to a moral certainty every hypothesis except that of the defendant’s intention or belief that the promise would not be performed.”79 Raising the burden of proof in this way solves the partial-performance problem without precluding prosecution of truly egregious wrongdoers. If properly applied, such statutory provisions can create a bulwark against improper convictions. Historical Misuses

Our worry about sloppiness in the criminal context is driven not only by a concern about the risk of error in individual cases but also by an anxiety that criminalization can be a tool for more systematic abuse. The history of ostensibly neutral legal doctrines that have, in their application, been influenced by considerations of race, sex, or other categories is well documented.80 In the contracts setting, Lea VanderVelde has shown that the Lumley doctrine, which authorized the use of negative injunctions for an employee’s breach of contract, was used exclusively against women for the first hundred years of its existence.81 Closer to home, Jennifer Roback has described how Alabama’s falsepromise law, which Bailey v. Alabama eventually held unconstitutional, was part of a systematic effort to bind African American workers to their employers and undermine the possibility of a competitive labor market.82 After specific performance on employment contracts had been held unconstitutional, employers used the crime of false promise to maintain their control over African American workers. “There is some evidence . . . that [even after Bailey] employment contracts continued to be enforced without proof that the worker intended to commit fraud. Often the worker would simply not know that the law required proof of intent to defraud or that the existing law was unconstitutional. . . . Thus, the law provided a veneer of legality for brutal activities that were actually illegal.”83 While we haven’t found systematic evidence of such abuse today, we do have the sense that many of the cases where a jury convicts

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on insufficient evidence involve defendants on the margins of society, who had neither the money to afford competent representation nor the fact finder’s sympathy. Appellate courts in particular should remain vigilant to the possibility that prosecution for false promise is a mask for discriminatory or otherwise impermissible social control. The answer is to limit prosecutorial discretion as much as possible, both by narrowing the crime to the most egregious behavior—where the defendant had an affirmative intent not to perform—and by insisting on sufficient evidence of that intent.

SPECIFIC STATUTORY PROHIBITIONS

Having described the generic crime of false promise and some of the ways the law might be improved, we turn our attention to two more specific statutory prohibitions: the contemporary crime of passing a bad check and the historical crime of seduction. Each illustrates both the nuances and the dangers of criminalization. Bad Checks

A close analogue to the crime of false promise is the crime of passing a bad check. The problem of collecting bad checks is a basic concern for any market economy and, indeed, has been used as a yardstick for comparing how different legal institutions respond to civil wrongs.84 In this country, criminal liability is meant to attach not to persons who write checks that bounce but to those who write a check with no intention of having it paid.85 A typical example of a badcheck statute is the New York Bad Check Law, which states that “[t]he prosecution must be able to plead and prove an intent by a defendant to utter a worthless check at the time it is uttered, not by the mere happenstance of subsequent insufficient funds, or even a subsequent closing of the account.”86 In virtually every U.S. jurisdiction, the defendant is guilty of passing a bad check if, in exchange for money or other property, she issues, with intent to defraud, a check or other written order that she knows will not be honored upon presentation.87 Employing the distinctions developed in earlier chapters, we will consider how courts go about answering the representation, the veracity, and the scienter questions in prosecutions for bad-check offenses. The representation inquiry: What does the writer “utter”? That writing a check says something is underscored by legal terminology: a check writer utters the check. The most obvious default representation is that, at the time of writing,

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there are sufficient funds in the writer’s account. With respect to this representation, the bad-check crime differs from false promise, since the central concern is not the subjective fact of the promisor’s intent but an objective fact about how much money is in the account. There is a respect, however, in which writing a check does say something about the writer’s intentions as to her future behavior. Writing represents not only that there are currently sufficient funds but also that the writer does not intend to impair its negotiability—say, by closing the account or by issuing subsequent checks that, if cashed first, will leave insufficient funds. Both representations—that there are currently sufficient funds to cover the check and that the writer does not intend to take any acts that would render the check nonnegotiable—are material for exactly the same reason. They suggest the likelihood that the check will be honored when presented. While we argue below that many jurisdictions overcriminalize the writing of bad checks, the law appears to be underinclusive along this dimension. Courts tend to limit the crime to misrepresentations about funds then available, thus missing the wrongdoing of writing a check with an intent to impair it before negotiation is attempted. As we have observed elsewhere, the problem is that legal actors fail to see that the single speech act can say multiple things. An example of this sort of myopia can be found in State v. Andrus.88 Andrus first opened a bank account with $490. He then wrote a $450 check, which was not presented at his bank for several days, during which time he wrote three smaller checks and cashed a check for $200. When the $450 check was finally presented, there were insufficient funds. The appeals court reversed the conviction, finding that knowledge of lack of funds at the time of issuance was necessary to sustain a conviction.89 While the court’s decision might be a reasonable interpretation of the statute, it did not even consider the possibility that the jury had concluded that Andrus intended the scheme from the beginning. If proven beyond a reasonable doubt, a check writer’s intent subsequently to impair negotiability should be subject to criminal sanction. But there are even more nuances to what writing a check says. So long as the check will be covered, the recipient doesn’t care whether there are funds there or not. Consequently, a too-narrow focus on the black-letter rule of currently sufficient funds can also lead to improper convictions. In State v. Hruza, a farmer appealed his conviction under Nebraska’s bad-check statute, contending that the state had failed to prove intent to defraud.90 Hruza had made an agreement with his bank to cover overdrawn checks until he received his biweekly payments from his dairy business. But the bank was having a bad year

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and failed to cover Hruza’s check. The lower court convicted Hruza, holding that one who issues a check has a responsibility under the statute to know that the check “will be covered and know positively, not hope but know.”91 The Nebraska Supreme Court rejected this reasoning: “It is not the existence or lack of existence of funds or credit at the time the check is written which controls; rather, it is the check drawer’s knowledge that he or she lacks sufficient funds or credit to pay the check in full upon its presentment which determines whether the requisite intent to defraud existed when the check was issued.”92 While the high court decided the appeal on the grounds of scienter, its reasoning implicitly recognizes that the act of writing a check doesn’t simply say that there are now sufficient funds, but that the recipient will be able to negotiate it. In most cases, the latter is true because the former is, but overdraft protection is just as good as far as the recipient is concerned. A recognition that what is material is the probability of the bank’s performance, not whether funds are there now, would serve as a corrective in these cases. We have recommended that when it comes to promises, the law should be sensitive to attempts to opt out of representational defaults—that it should allow, for instance, that not every promise must say that the promisor intends to perform. We therefore applaud courts that recognize check writers’ attempts to opt out of the representation that there are currently sufficient funds to cover the check. The most common way to do this is by postdating the check.93 When a check is postdated, it becomes much like a promissory note. It says not that there are currently sufficient funds in the issuer’s account but that there will be on the date specified. The same representation might be found where the parties have a practice of holding checks before deposit.94 While postdating voids the currently-sufficient-funds representation, it does not void what writing a check says about the writer’s intent not to impair negotiability or about the existence of an active account, and it includes the new representation of an intent to deposit sufficient funds before the date specified. Any one of these representations can still be false. Consequently, postdating does not preclude criminal prosecution. It just means that proof of falsity will take a different form. The facts in State v. Kelm provide an example of appropriate criminal liability notwithstanding a postdated check.95 The defendant had delivered a check for $6,000 but almost immediately asked the recipient to delay cashing it. When the recipient attempted to cash the check the following week, she found that the account had been closed and the check was uncollectable. Even though the request for delay nullifies the representation that there

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are currently sufficient funds, it does not nullify the representation that the defendant intends not to impair the check’s negotiability.96 The veracity and scienter inquiries. The evidentiary rules governing proof of the writer’s actual knowledge are where things really start to go downhill. To our minds, courts should focus on whether there is sufficient evidence of the writer’s knowledge that her check would not be honored or of her initial intent to impair its negotiability. We find in practice, however, that evidence falling far short of this is often considered sufficient to support conviction. There are no doubt many bad-check convictions based on more than enough evidence of insincerity at the time of utterance. In Murphy v. State, for example, the defendant was convicted after passing eighteen bad checks over the course of a week totaling nearly $14,500, though the accounts on which the checks drew had been closed before the checks were passed—thus exhibiting both repetition and impossibility.97 We would also say that a single check on an account that the defendant knew was closed is enough to show insincerity.98 Michigan’s bad-check provision mandates repetition evidence by criminalizing only instances in which a check writer utters three checks on a fictitious account within ten days.99 The length of time between issuance of the check and its being dishonored can also play a positive role in determining initial intent. Thus courts have concluded that the defendant did not have a bad initial intent where the victim waited to present the check for almost a month, during which time the defendant’s account was depleted of sufficient funds.100 But there is an eight-hundred-pound gorilla overshadowing all other aspects of bad-check criminalization. This is the so-called permissive presumption. The Arkansas “Hot Check” Law, for example, establishes that it shall be prima facie evidence that the defendant intended to defraud and knew at the time of writing that the check would not be honored if “[p]ayment was refused by the drawee for lack of funds, upon presentation within thirty . . . days after delivery, and the maker or drawer shall not have paid the holder the amount due . . . within ten . . . days after receiving written notice that payment was refused.”101 As the North Carolina Supreme Court, applying a similar provision, summarized it: “[T]he writing and passing of a worthless check in exchange for property, standing alone, is sufficient to uphold a conviction for obtaining property under false pretenses.”102 Unlike false promise and promissory fraud, where decision after decision has found that nonperformance alone is not enough to sustain liability, the permissive presumption creates a situation

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where merely bouncing a check and failing to make it good within ten days may be found criminal. Thus, in State v. Hogrefe, the Iowa Supreme Court observed that the two crimes, theft by check and theft by deception, “clearly overlap” and that one who issues a bad check may be charged with either, but noted that if the defendant is charged with theft by deception, “failure to perform, standing alone, is not evidence that the actor did not intend to perform,” while if she is charged with theft by check, issuing the worthless check alone can be sufficient for showing criminal intent.103 This evidentiary difference may well be one of the reasons for having specialized check statutes: theft by check was created to deal with the difficulty of proving intent in cases of issuing bad checks.104 But if the permissive presumption is inappropriate in the crime of false promise, it is no better in the case of bad checks. Shifting the burden of proof in this way denies the defendant the presumption of innocence.105 Most bizarrely of all, the permissive presumption does not condition a finding of intent or knowledge on the amount of the shortfall. A bank can refuse to honor a $1,000 check even if the account is just one dollar short. But the smaller the shortfall (relative to the normal flow of cash through the account), the greater the likelihood that the bounced check was a matter of mistake— that the check writer thought she had enough funds to cover the check. The permissive presumption bulldozes over such evidentiary niceties. In Wells v. State, the defendant’s account had only $18,000 and he had written $20,000 in outstanding checks at the time he wrote a check to a travel agency for $17,000.106 To our mind, the inevitable shortfall on at least one of the initially outstanding group of $20,000 checks does not provide nearly as much evidence of knowing misrepresentation as does the subsequent check for $17,000. Yet the reviewing court did not take advantage of this information, relying instead on the undifferentiated presumption of fraud whenever there are insufficient funds. This broad, unnuanced presumption that a bounced check is, at the behest of the check recipient, deserving of prosecution can be fodder for the private misuse of the criminal law. Watson v. State considered a situation in which loan sharks had forced their clients to tender worthless checks and then used the threat of criminal prosecution to renegotiate high-interest loans or to force payment, occasionally swearing out arrest affidavits against defaulting borrowers on the basis of the checks.107 Nor should we forget that a sloppy law of false promise can provide a mechanism for state-sponsored oppression. The permissive presumption means that it can be easier to establish criminal liability for

False Promise

bad-check writing than to establish civil liability for promissory fraud. This gives prosecutors too much discretion and may well lead to Bailey-like targeting of traditionally subordinated or marginalized groups. Seduction

We end our analysis of criminalization with a brief description of the largely historical crime of seduction. Seduction is interesting in part because it is an example of liability for insincere promising in contexts where the agreement itself would often not be enforceable—a topic we explored in chapter 7. It is also additional evidence as to how the crime of false promise can be converted into a mechanism of social control. The history of the crime has been extensively excavated by Jane Larson.108 Here we focus on the veracity question: proof of the defendant’s initial intent, which in the case of seduction is the seducer’s intention to marry. The crime of seduction is supposed to be the use of a false promise of marriage to induce a chaste woman to have sex with the seducer. “Seduction may not be accomplished by a promise that is not false. . . . The crime is not committed without the female being deceived into consenting to the intercourse.”109 On its face, this suggests that the crucial fact to be established beyond a reasonable doubt is the promisor’s initial intent not to marry, or at least his lack of an intent to do so. And we find many prosecutions of patently insincere promises. Thus in Davis v. State, where the seducer was married, the Arkansas Supreme Court appropriately emphasized the patent impossibility of performance: “The promise of marriage would be as false and feigned if the seducer knew that it was not in his power to perform it as it would be if he was capable to observe it.”110 But a closer reading of the case law suggests that, in many jurisdictions, it was the seduction itself or the subsequent nonperformance of the promise that was, in practice, considered the offense. That is, criminal liability lay whenever the seducer broke his promise—even if he originally intended to perform it. In State v. Brandenburg, a Missouri appellate court rejected the defendant’s claim that he had an “honest intention” to marry the victim: “It is the act of seducing and debauching which is the gravamen of the offense, and, if this is done by promises of marriage, the crime is complete, no matter what the defendant’s intentions may have been, or what offers he may have made after the act was consummated.”111 Similarly, the Arkansas Supreme Court concluded in Rucker v. State: “A man who seduces a chaste female under promise of marriage cannot refuse to carry out his promise. Public policy forbids that he should be permit-

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ted, after committing the act of intercourse under promise of marriage to say that he had intended to carry it out, but changed his mind and concluded not to do so.”112 Nor was this only a matter of presumption or burden of proof. In many cases, the law denied the defendant even the opportunity to put forward the affirmative defense that his promise had been sincere. In State v. Bierce, the Connecticut Supreme Court considered a case where, after the seduction, the victim engaged in “improper or indiscreet conduct . . . at a ball,”113 causing the defendant to change his mind about marriage. The defendant argued that because his promise of marriage had been honestly and sincerely made, he should not be convicted. Bristling with righteous indignation and not a little condescension, Chief Justice Storrs rejected that argument: “The proposition . . . that a virtuous and innocent female, who has been persuaded by a man to surrender her chastity to him by a promise of marriage, which is the strongest temptation that could be offered to prevail upon her to part with her innocence, and in which she implicitly confided, is not, although such promise was made honestly and with an intention to perform it, within the protection intended by the statute on which this information is founded, is, on the statement of it, so absurd, that we deem it unnecessary formally to refute it.”114 Courts even rejected the intervening veto of the marriage by parents of either the seducer or the victim as providing a changed-circumstances defense: “To permit [a defendant] to escape punishment by hiding behind the refusal of parental consent would have the practical effect of holding that boys under 21 years of age may commit seduction with impunity. . . . So we cannot accept the argument that the mere willingness of the accused to marry the girl is enough to exonerate him.”115 In a final weird twist, the Alabama Supreme Court in Suther v. State affirmed the lower court’s acceptance of the defendant’s statements “that he intended to marry [the victim], and that she was a nice girl” as evidence against him, since it tended to prove that the victim had been chaste at the time of the seduction—a separate element of the crime.116 These cases make no sense as examples of the crime of false promise. The real point of these laws was to deter seducers from using the promise of marriage as an inducement to fornication and to coerce those who nonetheless made such promises to marry their victims. (That the latter goal was also present is shown by the fact that if the defendant and victim did get married before trial, prosecution was statutorily barred.)117 Consequently, much of the judicial discussion of the defendant’s intent or willingness to marry the victim does not even

False Promise

distinguish between intent at the time of the promise and intent after the seduction. Unlike the law of promissory fraud and the law of false promise, the law of seduction makes nonperformance of the promise itself sufficient to create liability. At the end of the day, this history of criminal seduction does little to illuminate any of the more technical issues in the criminalization of insincere promising. But it does demonstrate that the law has been willing to impose punitive sanctions for promises that would not be enforceable through an action in contract. Seduction is also of a piece with a larger theme of this chapter. Going back at least as far as Bailey v. Alabama, the criminal law of false promise has been used as an instrument of social control by giving prosecutors broad discretion to punitively sanction subordinated subsets of society. Seduction is another example of how criminalization has been covertly used for such purposes. While its black-letter definition suggested that it was all about the defendant’s initial intent, the crime was in fact used as cover for the indirect enforcement of social norms whose violations were not subject to direct legal sanction. A larger concern of this chapter is the need to be alert to the danger that the same thing might be done with either bad-check statutes or the generic law of false promise.

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Chapter 9 Teaching

Promissory Fraud

At many law schools, promissory fraud falls between the contracts chair and the torts chair. Contracts professors feel at liberty not to teach it because it is formally a tort, while for Torts professors, it’s really about promissory liability. Most students thus graduate from law school unaware that the action exists. But as we have stressed, promissory fraud is a frequently litigated cause of action—many jurisdictions generate more promissory-fraud cases than cases involving the pedagogically more popular doctrines of mistake or impossibility.1 And this is not surprising, since promissory fraud is one of the only ways to overcome the preclusive effects of doctrines like the Statute of Frauds and the parol evidence rule and to recover punitive damages where there has been a breach of contract. While there have been recent efforts to incorporate new materials to teach ethics2 and international law3 in first-year Contracts, one doesn’t need new cases to teach promissory fraud. As we argued in chapter 7, the landscape of promissory fraud is diverse and reaches well into the existing contractual terrain. Thus the facts in Peevyhouse v. Garland Coal & Mining Co. suggest that the defendant coal com194

Teaching Promissory Fraud

pany might have never intended to perform its promise to reclaim the plaintiff ’s farmland.4 Red Owl’s repeated unfulfilled assurances in Hoffman v. Red Owl make one wonder whether it misrepresented its intent to enter into a franchise agreement.5 In discussing Carlill v. Carbolic Smoke Ball Co., it’s worth asking whether Carbolic Smoke Ball recklessly misrepresented its intention to pay the £1,000 as promised and, if so, whether it shouldn’t also have been liable for promissory fraud.6 Alaska Packers’ Association v. Domenico raises two questions concerning promissory fraud.7 The first is whether the workers intended all along to hold their employer up for more money; the second is why the employer shouldn’t be held liable for promissory fraud, even if it never intended to perform its promise to pay the holdup wages. And as a final example, the facts of Vokes v. Arthur Murray, Inc. suggest fraud not only in the dance company’s representations as to the plaintiff ’s aptitude but also as to the probability that she would ever use so many hours of lessons, from which it follows that it misrepresented the objective probability that it would perform.8 To cover the idea of legal liability for insincere promising, most law professors wouldn’t need to change radically their syllabuses but could use the opportunities that naturally arise in these and other cases. Of course, the interested professor could also supplement her syllabus with materials that illustrate particular principles of the promissory-fraud doctrine. Lord Bowen’s 1885 opinion in Edgington v. Fitzmaurice has the most quoted line in promissory fraud jurisprudence: “The state of a man’s mind is as much a fact as the state of his digestion.”9 A comment to section 530 of the Second Restatement of Torts contains both the modern codification of what we have called the categorical interpretation and exemplifies the common neglect of scienter: “Since a promise necessarily carries with it the implied assertion of an intention to perform[,] it follows that a promise made without such an intention is fraudulent.”10 And an opening for a more nuanced discussion can be found in section 171 of the Second Restatement of Contracts, which states that a promisee may understand the promise to represent an intent to perform only “[i]f it is reasonable to do so,” though it doesn’t fully explain when that reasonableness condition is met.11 There are also plenty of opinions that tackle allegations of insincere promising head-on, by jurists both well known and obscure. In the former category, perhaps the richest opinion is one we’ve mentioned a number of times, Justice Holmes’s dissent in Bailey v. Alabama.12 That case involved not a civil action for promissory fraud but a criminal conviction for false promise. Up for review was the conviction of an African American worker who had taken a $15 signing

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bonus to work for a year and then, after a little more than month, breached without returning the bonus. The Alabama criminal statute in question provided that any person who, “with intent to injure or defraud his employer,” entered into a written labor contract and received money in advance, and who then “without refunding such money . . . refuses or fails to perform such . . . service,” could be punished by a fine of double the damages suffered by the employer.13 The statute also established (1) that the refusal to perform or refund advanced money was prima facie evidence of the intent to defraud the employer, and (2) that the worker was not allowed to testify “as to his uncommunicated motives, purpose or intention.”14 Holmes’s dissent nicely explains the difference between breach of contract and promissory fraud and puts forward a theory of changed circumstances that is consistent with the one we developed in chapter 6: I think it is a mistake to say that this statute attaches its punishment to the mere breach of a contract to labor. It does not purport to do so; what it purports to punish is fraudulently obtaining money by a false pretense of an intent to keep the written contract in consideration of which the money is advanced. (It is not necessary to cite cases to show that such an intent may be the subject of a material false representation.) But the import of the statute is supposed to be changed by the provision that a refusal to perform, coupled with a failure to return the money advanced, shall be prima facie evidence of fraudulent intent. I agree that if the statute created a conclusive presumption it might be held to make a disguised change in the substantive law. But it only makes the conduct prima facie evidence, a very different matter. Is it not evidence that a man had a fraudulent intent if he receives an advance upon a contract over night and leaves in the morning? I should have thought that it very plainly was.15

The opinion is also interesting for the types of evidence that Holmes sees fit to exclude from the veracity and scienter inquiries: “I do not see how the result that I have reached thus far is affected by the rule . . . that the prisoner cannot testify to his uncommunicated intentions, and therefore, it is assumed, would not be permitted to offer a naked denial of an intent to defraud. If there is an excuse for breaking the contract, it will be found in external circumstances, and can be proved.”16 Like the eight justices who voted in the majority, we think Holmes seriously missed the boat on this one. While lack of changed circumstances is probative of fraud, Alabama did not appear to have limited the time period between the promise and the breach. Holmes’s “overnight” hypothetical was relevant, therefore, neither to the statute nor to the facts of the case. And the conclusion that

Teaching Promissory Fraud

excuse must be found in “external circumstances” ignores that there are some circumstances that might only be known to, and best explained by, the defendant. Criminal defendants should have a right to testify as to whether they had the requisite mens rea. More broadly, the racial dimension of the case also bears comment. Alabama was enforcing this criminal provision almost exclusively against African Americans as a way of preventing their movement and depressing their wages.17 Holmes’s dissent presents another example of his general insensitivity to subordination and is of a piece with his opinion in Buck v. Bell, where he upheld Virginia’s practice of forcibly sterilizing the mentally disabled with the credo “Three generations of imbeciles are enough.”18 And the case provides an object lesson in how laws that ostensibly do no more than regulate commercial relations can be used as tools of oppression. Another pedagogically rich opinion is Speakers of Sport, Inc. v. ProServ,19 in which Judge Posner both describes the role that a pattern of deception can play and explains the skepticism that some jurisdictions continue to maintain toward the action for promissory fraud.20 The case concerned a sports agency’s suit against a competing agency for allegedly poaching one of its clients (Ivan Rodriguez, a catcher with the Texas Rangers) with an insincere promise that it could get him more lucrative endorsement deals. Posner explains Illinois’s reasons for its “scheme or device” requirement as follows: There would be few more effective inhibitors of the competitive process than making it a tort for an agent to promise the client of another agent to do better by him— which is pretty much what this case comes down to. It is true that . . . the competitor’s privilege does not include a right to get business from a competitor by means of fraud . . . , but the practicalities are different. If the argument were accepted and the new agent made a promise that was not fulfilled, the old agent would have a shot at convincing a jury that the new agent had known from the start that he couldn’t deliver on the promise. Once a case gets to the jury, all bets are off. . . . This threat to the competitive process is blocked by the principle of Illinois law that promissory fraud is not actionable unless it is part of a scheme to defraud, that is, unless it is one element of a pattern of fraudulent acts. By requiring that the plaintiff show a pattern, by thus not letting him rest on proving a single promise, the law reduces the likelihood of a spurious suit; for a series of unfulfilled promises is better (though of course not conclusive) evidence of fraud than a single unfulfilled promise.21

While we disagree with the Illinois approach—judicial insistence on legally sufficient evidence of each element of promissory fraud answers the threat to

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the competitive process—Judge Posner’s opinion nicely sets up the debate. The case is also instructive because the majority ultimately found that the alleged promise to Rodriguez was mere puff, meaning that it couldn’t be the basis for a promissory-fraud action even in jurisdictions with a more liberal approach. Of course the interesting promissory-fraud cases are not limited to those written by famous jurists. A nice, straightforward case is Hammonds v. Turnipseed.22 The defendant had listed his property with a broker for an agreed-upon 10-percent commission but then refused to sell to the broker’s buyer, even when that buyer made a second offer that was substantially the same as the defendant’s counteroffer. Precisely six months later and without informing the broker, the defendant reopened negotiations with the same buyer and sold the property. The Alabama appellate court affirmed the jury finding of promissory fraud based on other similar unexplained breaches (the defendant had used numerous brokers over the years but had paid commissions on only two of the 130 properties he sold); evidence of a plan to defraud (the six-month delay corresponded to the statutory six-month limit on the duty to pay a brokerage fee); and a lack of changed circumstances (the defendant eventually sold on substantially identical terms to the earlier offer, suggesting that it would have been satisfactory before). A Tennessee case, Brungard v. Caprice Records, has a compelling fact pattern and nicely illustrates the interaction between promissory fraud and the parol evidence rule.23 Caprice Records charged the claimant, who had a ninth-grade education, $3,000 to produce a record. Under the terms of the written contract, Caprice was required to do very little to promote the record, and its subsequent actions did not exceed its obligations. Yet Caprice had asked the claimant to audition, had represented that it was a large record company and given her a brochure falsely suggesting that it was about to build a music entertainment complex, and, the claimant alleged, had orally mischaracterized the terms of the contract. Taken together, this constellation of behavior, some innocent enough in itself and some patently deceptive, clearly evinces a plan to deceive the claimant as to the exact nature of the agreement. While the parol evidence rule would have excluded much of the evidence of deceit from a breach-of-contract action, the appellate court correctly held that that rule “has no application to a case involving fraudulent misrepresentation which induces the contract.”24 The court concluded that, while the Tennessee Supreme Court had yet to recognize the action for promissory fraud, it was headed in that direction and therefore affirmed the trial court’s finding of promissory fraud. Another good parol evidence case is Berkeley Bank for Cooperatives v. Meibos,

Teaching Promissory Fraud

in which promissory fraud was successfully deployed as an affirmative defense against a bank’s attempt to collect on nine promissory notes.25 The notes had been signed by individual dairy farmers to guarantee a loan to a farm collective, which subsequently defaulted. The farmers alleged that the bank had convinced them to sign the notes by orally promising that they were merely to ensure the continued provision of milk, not as actual collateral, and that the bank would not collect on them. The case is interesting for two reasons. First, it again demonstrates that promissory fraud is a way to avoid the parol evidence rule (a result that caused one justice to dissent). In accepting the jury’s finding that the bank had in fact made the oral promises, the court emphasized inter alia that the farmers were in no position to assume the financial obligation of the notes as written. It reasoned that the fact that the farmers had signed them was therefore evidence that they had been given the oral assurances that the notes would not be collected. This is consonant with one of the ways we have proposed using motive evidence—the fact that a promisee would have required a highassurance promissory representation to convince him to rely means that it is more likely that the promisor made such a representation. Second, the case also illustrates the need for judicial monitoring of the sufficiency of the evidence. While the court accepted the jury’s finding of no initial intent to perform, it did not describe any evidence for that conclusion beyond the breach. And in fact, the bank had made no inquiries into the farmer’s financial situation, hadn’t included the usual acceleration clauses in the notes, and, as the dissent pointed out, hadn’t pursued collection until after the farmers ceased delivering milk, all of which suggested that its oral promises had been sincere and its breach was the result of a subsequent change of heart. One final tool for teaching promissory fraud is to go beyond the case materials to history, literature, and popular culture. Promissory fraud and false promise are not legal constructions, but the law’s response to a fact about our everyday promissory practices—the fact that the act of promising not only is the undertaking of an obligation but also often says something about the world. That this representational dimension is part of the everyday meaning of promises is confirmed by the prevalence of the idea of insincere promising in the stories we tell. Once one identifies the idea, promissory misrepresentations appear everywhere. We have already mentioned many examples in earlier chapters, including the princess’s promise in The Frog Prince that she will live with the frog if only he will retrieve her golden ball, Max Bialystock’s promise in The Producers to pay out more than 1,000 percent of the profits of his Broadway musical, Wimpy’s perennial promise to gladly pay on Tuesday for a hamburger

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today, and George Bush Senior’s potentially fraudulent promise “Read my lips: No new taxes.” Any one of these or the other examples we mentioned in earlier chapters could be dissected using the analytic tools we have developed. We will end with a frivolous example: Lucy van Pelt’s repeated insincere promises to hold a football for Charlie Brown to kick.26 Charles Schultz inaugurated the almost annual bit in 1951 and played with the interaction until 1999. Lucy’s motive is clear: she loves to see Charlie Brown fail. This is what we might call “spiteful promissory fraud.” Her lack of intent to perform is demonstrated first and foremost by the timing: she says she will hold the ball but then moments later pulls it away just as Charlie Brown’s foot is about to make contact. There is also occasional evidence of a scheme to defraud. On December 16, 1956, Lucy offered Charlie Brown a million dollars to try again—another promise never delivered on. And while Lucy puts forward various excuses at one time or another (September 25, 1966: a “ten-billion-toone” muscle spasm), her repeated breaches and the doctrine of chances ultimately allow of only one conclusion: that, each time, she intended not to perform from the start. A few of Lucy’s excuses are also of legal interest. On October 4, 1964, she claimed defective formation: “Peculiar thing about this document . . . it was never notarized.” This sort of excuse we would find unavailing. Like the Statute of Frauds and the parol evidence rule, notarization requirements are meant as shields against fraud, and courts should not allow promisors to convert them into tools for accomplishing it. On the other hand, we are more sympathetic to Lucy’s September 8, 1963, claim of defective formation because “[a] woman’s handshake is not legally binding.” The subversive use of insincere promising by the targets of discriminatory legal regimes is much more attractive. Finally, we cannot help but ask the question of reasonable reliance—an essential element to even a claim of the moral, much less the legal, wrong. While her many broken promises increase our certainty that Lucy never intended to perform any of them, they simultaneously reduce the innocence of the victim with regard to later breaches. On October 16, 1983, Charlie Brown momentarily walked away, saying, “I’m just glad you’re the only person in the world who thinks I’m dumb enough to fall for that trick again.” While we hate to blame the victim, one cannot help charging Charlie Brown with complicity in Lucy’s misdeeds. (Sally diagnosed the relationship on November 11, 1992: “I’ve discovered that love makes us do strange things.”) On October 29, 1995, Charlie Brown threatened to sue if Lucy pulled the ball away again. We doubt, however, that by that time Charlie Brown had a case.

Chapter 10 Conclusion

You gotta be sincere! —“Honestly Sincere,” Bye Bye Birdie!

There is an old story about the origin of the word “sincerity,” according to which dishonest Roman potters would fill cracks in flawed pottery with wax and then paint over the imperfection, so that the unsuspecting buyer would only learn the true condition of his purchase when the pot was heated at home for the first time. Pottery makers thus began selling their wares with the guarantee “sine cera,” or without wax.1 Unfortunately, from our perspective, the story is apparently apocryphal and the word actually derives, via the French, from the Latin sincerus, meaning whole, pure, or genuine.2 But the staying power of that etymological fable is consonant with the way we’ve been thinking about promissory sincerity, and we can use it to get at some of the major conclusions of this book. Whether or not the pot has been repaired with wax, after paying and leaving the shop, the customer has bought it.3 Similarly, whether

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or not the promisor has an initial intent to perform, her promise binds her. This is consonant with Holmes’s insight that “no one will understand the true theory of contract or be able even to discuss some fundamental questions intelligently until he has understood that all contracts are formal, that the making of a contract depends not on the agreement of two minds in one intention, but on the agreement of two sets of external signs,—not on the parties’ having meant the same thing but on their having said the same thing.”4 But the binding power of a promise is not the only dimension of many promissory transactions. Just as the fictional Roman potters added a representation about the hidden qualities of their goods, so many promisors find it in their interest also to say something about their intentions. Both potter and promisor choose to share information that they have and their counterpart wants. In both cases, the information is about a present fact (the characteristics of the bowl, the promisor’s present intent), but it is a fact that is forward looking—it tells the buyer that he can safely rely on the crockery’s performance or tells the promisee that he can rely on the promisor doing the thing promised. Finally, in both cases there is often a level of mistrust going into the transaction that makes it in the parties’ mutual interest to have the representation backed up by a legal guarantee. But here’s a difference between the promissory representations we are interested in and the story of the potters: In most cases, a promisor’s representation that she intends to perform does not require a separate utterance—“This casserole is sine cera”—but is understood to be part of the meaning of the very act of promising. Another of the themes of this book has been that a single speech act often can do and say multiple things. A promise both puts the promisor under an obligation and, in many cases, informs the promisee that she intends to fulfill that obligation. The simplicity of the words I promise to masks the complexity of what those words are being used to accomplish. Now the fact that promising is a multidimensional act has not been entirely lost on legal theorists. For instance, courts and legislatures have developed highly refined rules for the enforcement of warranties, both explicit and implicit, and legal academics have discussed their use extensively.5 And the implied duty of good faith and fair dealing also acknowledges the fact that the promissory relationship involves more than the duty to perform or else pay damages.6 Our thesis has been that what a promisor says about her intent and the probability of her performance constitutes another important component of many promissory transactions, one that the law does well to recognize. Indeed, the fact that the representation of an intent to perform is part of the

Conclusion

everyday default meaning of a promise is also proof of the pervasiveness and importance of such representations. We have taken a functionalist approach to what promises say. We don’t want to deny that such representations have a moral dimension—it is odd, for instance, to think of someone simultaneously undertaking an obligation and intending not to carry it out.7 And they may well reflect something essential in the very institution of promising—this was Kant’s enduring insight. But representations of intent are also tools that promisors use to accomplish very specific tasks. Promising is a complex joint intentional activity and involves a high degree of both coordination and trust between the parties.8 In most cases, it takes more than the performative force of the promissory act (the creation of an obligation to do the act promised) to secure those conditions. Among other things, it often also requires a credible constatives dimension—the sharing of information, saying that such and such is the case—and especially representations about the promisor’s intentions and the probability of her performance. A promisor who says that she intends to perform generally does so to convince the promisee that it is in his interest to rely, that is, that the promisee is so likely to reap the benefits of her performance that he can safely undertake the costs of relying on it. And while these representations too are subject to certain duties (the duty to tell the truth) and even create obligations (for example, to share new information as it becomes available), there is nothing to be gained from trying to force them into the model of promissory commitment. It is a mistake to try to reduce everything that is happening between the parties to the principle of pacta sunt servanda. This functionalist approach also leads us to two important antiessentialist conclusions about what promises say. First, there are many situations in which a promisor doesn’t need her promise to do anything but put her under an obligation in order to convince the promisee to rely. This is so, for example, when the promisee’s costs of reliance are very low or when he has other grounds for believing that the promisor is very likely to perform. In such a situation, the promisor might well want to opt out of the default representation of an intent to perform. The law should allow her to do so. Second, what most promisees really care about is not what the promisor intends but the likelihood that she will perform. Informing him of her intent to perform gives him information about the probability that she will do so, but this is not the only form such information can take. In particular, a promisor can also explicitly say what the probability of her performance is or represent that she is so likely to perform

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that the promisee can safely rely on it. A promisor can also represent an intent to perform even if a better opportunity comes along. Promises can thus represent intentions that are not conditional on certain changed circumstances. The representational aspect of promissory transactions is itself multidimensional, as different things are said depending on the words uttered, on their context, and on the relationship between the parties. The final big idea in this book has been to start thinking about what, if anything, the law should do about the fact that promisors say things with their promises. Our antireductionist approach to the theory of promising—which refuses to pack every aspect of the transaction into the duty to perform—also influences our thinking about the law of contracts. There is no a priori reason to think that a single legal remedy can best address every aspect of the promissory transaction. Thus, while a promisor’s obligation to perform is often best enforced with a liability rule, like expectation damages, the law should in many cases back up what a promise says about the probability of performance with property-rule remedies, like punitive damages and even criminal liability. That said, because there are plenty of situations in which promissory representations do no work (including where breach-of-contract remedies are fully compensatory), we also think that promisors should be able to opt out of most such liability. The easiest way to enable them to do so is for courts to apply clear interpretive rules that allow promisors, in certain circumstances and with the right words, to say very little about the probability of performance. While the law should separately enforce promissory sincerity, it should also recognize when a promise does not represent an intent to perform, when it doesn’t assure the promisee that the chances of performance are so great that he can safely rely, and so forth. Our conclusions about legal liability for promissory insincerity are based on an analysis of how we can make contracts function more efficiently. They therefore call into question the commonplace assumption that the domain of contracts is one of strict liability and is governed by only compensatory remedies. In fact, there is no one-size-fits-all contracts remedy. One way of thinking about the different damages in contract law is as a function of changed circumstances, which we can represent graphically as follows:

Conclusion

Where there is nonperformance without excuse—that is, few or no relevant changed circumstances—it is likely that the promisor intended from the start not to perform, and she should therefore be held liable for punitive damages. Where there are some changed circumstances, but they are not significant enough to excuse the promisor from her duty to perform—as when performance has become more expensive, but not prohibitively so—expectation damages are appropriate. Finally, where changed circumstances are so significant that they legally excuse performance—because of, for instance, impossibility or frustration—then we let the losses lie where they fall and there is no compensation for nonperformance. The burden of proof in these different doctrines shows that compensatory damages are the norm—expectation damages are the default, while the claimant bears the burden of showing bad initial intent and the defendant the burden of proving excusing changed circumstances. But we should not be misled into thinking that expectation damages are all there is. In addition to some of these larger themes, we have also critically analyzed many of the details of the law of insincere promising and its implementation. The main conclusions of our doctrinal discussion are summarized in appendix A, which we’ve entitled “Draft Prestatement of the Law of Insincere Promising.” While we are prepared to defend these nuts-and-bolts proposals, we freely admit that there is room for debate about the details. Whether or not the law eventually adopts one or another of our proposals, we will be satisfied if they provoke debate and start the participants in our legal culture thinking more about what it is that promises say.

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Appendix A: Draft Prestatement of the Law of Insincere Promising

100. PROMISSORY MISREPRESENTATION

(a) A promissory representation is a representation made, implicitly or explicitly, by the promisor at the time of promising that concerns the probability that the promise will be performed. Representations of intention concern the probability of performance. (b) A promissory misrepresentation is a promissory representation that is false at the time it is made. 101. PROMISSORY REPRESENTATIONS OF INTENTION

(a) Absent contrary circumstances, a promise represents that the promisor intends to perform. Contrary circumstances can include a party’s explicit disavowal of such a representation, the relationship between the parties, local practice, and the promisor’s statement to the promisee of what the probability of her performance is. (b) Every promise necessarily represents that the promisor does not intend not to perform. 102. WARRANTING PROMISSORY REPRESENTATIONS

(a) Unless a promisor warns the promisee that she does not believe that it is in the promisee’s interest to rely on her performance or states to the promisee what 206

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the probability of her performance is, her promise represents that she does not believe that the probability of her performance is so low that it is not in the promisee’s interest to rely on her performing. (b) Circumstances indicating that a promise represents that the probability of performance is so great that it is in the promisee’s objective interest to rely on that performance can include explicit statements, local practice, and the relationship between the parties. 103. NONFRAUDULENT PROMISSORY MISREPRESENTATION

A plaintiff who claims promissory misrepresentation must show that: (1) the defendant made a promissory representation; (2) that representation was, at the time it was made, false; (3) it was foreseeable that someone in the claimant’s position would act or refrain from acting in reliance on the representation; (4) the claimant justifiably relied on the representation, which is to say that, because of the representation, the claimant reasonably expected that the promise would be performed and relied on that expectation; and (5) the claimant suffered damages as a proximate result of his reliance. 104. PROMISSORY FRAUD

(a) The action for promissory fraud is a species of the action for deceit. In order to prove promissory fraud, a claimant must show that: (1) the defendant made a promissory representation; (2) that representation was, at the time it was made, false; (3) the defendant knew that the representation was false or acted with reckless disregard of its truth; (4) it was foreseeable that someone in the claimant’s position would act or refrain from acting in reliance on the representation; (5) the claimant justifiably relied on the representation, which is to say that, because of the representation, the claimant reasonably expected that the promise would be performed and relied on that expectation; and (6) the claimant suffered damages as a proximate result of his reliance.1 (b) Proof that a promisor did not intend to perform or that a promisor intended not to perform, which can satisfy (2), is not always sufficient to show that a promissory misrepresentation was made knowingly or recklessly, that is, to satisfy (3). 105. THE CRIME OF FALSE PROMISE

A defendant may be found guilty of the crime of false promise only if there is proof that at the time of promising the defendant intended not to perform and the evidence excludes all other hypotheses to a moral certainty. Consequently, a promisor who had an undisclosed conditional intention to perform (an intention to perform if C), who has an undisclosed disjunctive intention to perform (an intention to perform or to X), or who had no intention with respect to performance is not guilty of false promise. 106. PROOF OF INTENT

(a) The nonperformance of a promise, while probative as to the defendant’s intent at the time of promising, is never dispositive as to that intent.

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(b) Other evidence of no initial intent to perform or an initial intent not to perform can include: (1) a short time or lack of changed circumstances between the last promissory representation and nonperformance; (2) the fact that the defendant made no preparations or attempts to perform; (3) evidence that the defendant knew at the time of promising that she would be unable or unwilling to perform; (4) other deceptions by or actions of the defendant that suggest a scheme to defraud; and (5) similar broken promises by the defendant without excuse or explanation. (c) Motive evidence that the defendant believed at the time of promising that it would be in her best interest to perform strongly suggests that she did intend to perform. 107. PROOF OF THE PROBABILITY OF PERFORMANCE

Evidence that the probability of performance was lower than represented can include: (1) the promisor’s intent at the time of promising; (2) circumstances at the time of promising suggesting that the promisor would likely not be able or would choose not to perform; and (3) empirical evidence of the promisor’s past performance record. 108. REMEDIES FOR NONFRAUDULENT PROMISSORY MISREPRESENTATION

(a) A claimant who has proven by a preponderance of the evidence that the defendant made a promissory misrepresentation is entitled: (1) to recover all of the costs that he has reasonably incurred in reliance on the promissory representation as well as his litigation costs, all of which, where there is proof that the type of promissory misrepresentation in question is particularly likely to go unnoticed or to evade legal sanction, may be multiplied by the reciprocal of the probability of enforcement; and (2) to rescind the contract. (b) A contractual agreement that one or more parties shall not be liable for nonfraudulent promissory misrepresentation is enforceable. A contractual agreement that nonfraudulent promissory misrepresentation shall entitle the deceived party to any or all of the remedies for promissory fraud is enforceable. 109. REMEDIES FOR PROMISSORY FRAUD

(a) A claimant who has proven by a preponderance of the evidence that the defendant has committed promissory fraud has the option either: (1) to recover her reliance costs as described in § 108(a)(1); (2) to recover punitive damages in the amount of the defendant’s gain from the misrepresentation multiplied by the reciprocal of the probability of enforcement; or (3) to demand specific performance. (b) Where a contract is enforceable on its face, an agreement that one or more parties shall not be liable for promissory fraud shall not be enforced. A contractual stipulation that, in the case of promissory fraud, punitive damages shall be assessed in a certain amount or that the remedy will be specific performance is enforceable.

Prestatement of Law of Insincere Promising

110. RELATIONSHIP TO DAMAGES FOR BREACH OF CONTRACT

An award of monetary damages for promissory misrepresentation or promissory fraud does not forestall separate recovery for breach of contract. A claimant’s reliance interest, however, may only be recovered once. Consequently, a finding of breach of contract will only allow additional recovery of the difference between the claimant’s expectation and reliance interests. An award of rescission for promissory misrepresentation or specific performance for promissory fraud precludes recovery of damages for breach of contract. 111. PLEADING REQUIREMENTS FOR PROMISSORY FRAUD

In all averments of promissory fraud, the circumstances constituting fraud must be stated with particularity. A complaint must also state facts sufficient to create a prima facie case of promissory misrepresentation and that the promisor made the misrepresentation knowingly or recklessly. Where a plaintiff fails to plead promissory fraud with particularity, the claim should be dismissed without prejudice.2

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Appendix B: Promissory Fraud Abroad

This appendix attempts to counterbalance, to a small degree, the focus of the foregoing analysis on U.S. law by briefly examining the treatment of promissory fraud in other parts of the world. There is a host of interesting comparative-law issues when it comes to the law of promissory misrepresentation. We do not answer them all here, but we indicate where interesting questions exist and venture a few hypotheses based on the foregoing analysis. PROMISSORY FRAUD IN THE BRITISH COMMONWEALTH

The common-law history of promissory fraud largely dates from Lord Bowen’s 1885 opinion in Edgington v. Fitzmaurice.1 Whether it is the power of its reasoning or of its gastronomic image (“The state of a man’s mind is as much a fact as the state of his digestion.”),2 this is the decision that is cited time and again by courts and commentators across the Commonwealth, from Australia to India to Hong Kong to Nigeria.3 In this primogenitor suit, the directors of a company sold debentures with the promise that the proceeds would be used to complete certain buildings, to purchase horses and vans, and to develop the supply of cheap fish from the coast. The minutes of the Board of Directors, however, indicated that the real object of the loan was to enable the directors to pay off pressing liabilities. When the company defaulted on the debentures a few months later, the Reverend Mr. Edgington sued for repayment of sums advanced. His reason for pursuing an 210

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action for fraud instead of breach of contract was not to secure punitive damages but seems to have been an effort to accelerate the payment of the principal. If Edgington is the most important promissory-fraud case, then the Indian Contract Act (which was in fact written by the British in 1872, thirteen years before Edgington was decided) is far and away the most generative statutory embodiment of the idea. Section 17 of the act expressly includes within the definition of “fraud” “a promise made without any intention of performing it.”4 The statute has been adopted by a number of former British colonies in Asia, including Bangladesh, Malaysia, Pakistan, and Singapore, and is thus the source of substantial scholarly exegesis.5 For example, we find the interesting suggestion by Singhal and Subrahmanyan that “[i]f the essential feature relied on is the promise, without reference to the intention of the party in making it, there is no fraud.”6 This correlates with our idea of an opaque or blank promise, albeit considered from the perspective of what the promisee relied upon rather than what the promisor represented. In the terms of chapter 2, in the situation Singhal and Subrahmanyan describe, the basis for reliance appears to be solely the promise’s performative force, and not its representational content. For the purposes of promissory-fraud liability, this would be equivalent to treating the promise as blank. In looking at other common-law jurisdictions, we also find scattered opinions agreeing with our view that what is ultimately material is not promisor intent but the probability of performance. Thus in a 1976 case, British Airways Board v. Taylor, the House of Lords upheld a judgment against an airline under the Trade Descriptions Act 1968 for confirming tickets on overbooked flights.7 It is almost certain that at the time of confirmation the airline didn’t intend to deny individual ticket holders seats. In fact, it may have (over-) optimistically intended to perform, on the assumption that there are always no-shows. But if the flight were severely overbooked, the airline probably also knew that it had a low probability of honoring reservations—the crucial fact that it failed to disclose. Similarly, in a 1983 case before Australia’s Trade Practices Commission, Gardiner v. Suttons Motors (Homebush) Pty Ltd., a car dealership was held liable for promising that an applicant would be able to purchase the motor vehicle at the expiration of the lease.8 The dealership’s fraud liability was not based on a finding of misrepresented intent. Rather, the dealership was found to have made its promise with reckless indifference as to whether it would be adhered to. We are also glad to find a South African commentator recognizing the catch-22 of allowing a defendant’s in-court testimony as to her intent as evidence of promissory fraud. R. H. Christie observes that “a party who is alleged to have induced another contract by promising to do something in the future may find himself in a difficult position. If he denies making the promise he will naturally deny the intention to fulfill it, so if the court finds he did make the promise it must have been made fraudulently, since he has proved his own state of mind at the time.”9 This parallels our recommendation in chapter 6 that courts refuse to allow a defendant’s in-court denial of having made the promise as evidence of promissory fraud. Finally, the House of Lords has recently approved the use of section 16 of the Theft Act 1968 criminally to punish people who use checks or credit cards knowing there are insufficient funds in their bank accounts.10 This is consistent with our chapter 8 analysis of the close ties between bad-check crimes and promissory fraud. On the whole, we find that the legal response to insincere promising is alive and well recognized in other common-law countries.

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PROMISSORY FRAUD IN OTHER TRADITIONS: SOME COMPARATIVE HYPOTHESES

It is the English common-law systems that have most systematically concerned themselves with the threat of promissory misrepresentation. But we believe that the analytic tools we have employed are more broadly applicable. In this section we suggest some directions a comparative approach might take and venture a few hypotheses, based on the arguments in earlier chapters, about what it might discover. Most obviously, we would expect to find a strong correlation between the availability of punitive damages and the frequency of promissory-fraud claims.11 In common-law jurisdictions, this will also mean a correlation with the depth of the doctrine, since the possibility of receiving supercompensatory damages incentivizes plaintiffs to push the cause of action as far as it can go, and a large volume of cases creates repeat players in both the bar and the judiciary. This hypothesis is partially confirmed by a comparison among U.S. states. Our experience is that a disproportionate number of promissory-fraud cases come from Alabama, a jurisdiction known for large punitive-damages awards. The analysis of chapter 4 also suggests that the more likely it is that breach-of-contract damages will fully compensate, the less need there is to disincentivize insincere promises. This is because promisees care about what promises say about the probability of performance in large part because they expect that if the promisor breaches, damages won’t fully compensate their reliance. As damages for contractual breach become more fully compensatory, the materiality of promissory representation and the need for legal measures to prevent insincere promises diminish. Thus, for example, because the American rule is an important cause of subcompensation in the United States, there is less need for a doctrine of promissory fraud in jurisdictions that allow the prevailing party to recover litigation costs. And if it is true that specific performance is more likely to be fully compensatory, the same will hold of jurisdictions in which specific performance is the default remedy in contract. That said, there are good reasons to think that every legal system will have some measures to deal with insincere promisors. For one thing, as we saw in chapter 7, it is often proper to impose liability for promissory misrepresentation where an action for breach does not lie— for example, to prevent the Statute of Frauds from serving as a tool for fraud. Promissory fraud will be relevant for similar reasons in any jurisdiction that refuses to enforce certain promises because of procedural defects—even if that jurisdiction prefers specific performance or prohibits punitive damages. Moreover, as a practical matter, it is doubtful that any system can always achieve perfect compensation, since some causes of undercompensation—like imperfect enforcement and judgment-proof defendants, not to mention the ex ante preferences of the parties—are virtually impossible to eradicate. In addition, promisees use information about the probability of performance for more than the binary decision of whether or not to rely. As we argued in chapter 4, that information is also relevant to decisions between possible contracting partners and to decisions regarding the level of investment in precautions against breach and in measures that will generate profit in the case of performance. And finally, there is the familiar moral intuition that it is simply wrong to make a promise one does not intend to keep. All of these are reasons to expect some measures to address insincere promises, no matter what the legal system.

Promissory Fraud Abroad

Where differences between jurisdictions may be most apparent is in the mechanisms used to deter insincere promisors and to compensate duped promisees. Where punitive damages are not available, the primary vehicle for deterrence may be criminal sanctions. We are aware of analogues to the U.S. crime of false promise in Germany and Japan.12 Other countries may have more targeted statutes. In Belgium, for instance, there are specific criminal prohibitions against ordering a meal in a restaurant or staying in a hotel with the knowledge that it is impossible to pay, and against purchasing gas without paying.13 It’s interesting that these specialized statutes address situations where there is a relatively short period of time between promise and breach, making it easier to establish a lack of intent. Another difference may be in how the wrong is styled for the purpose of compensation. The concept of dol (fraud) in French civil law is much broader than its common-law analogue, taking in a wider spectrum of bad faith.14 In particular, “dol is not confined to representations and there is therefore in French law none of the difficulty with which [commonlaw lawyers] are familiar of distinguishing representations of opinion or intention from representations of fact or representations as to the future from those as to the present.”15 Cases that would trigger the special action for promissory fraud in the United States may remain undistinguished in France, simply falling under the more general heading of dol. The influential German doctrine of culpa in contrahendo provides another possible mechanism for recovery against insincere promisors, one that provides for precontractual liability.16 The action for culpa in contrahendo imposes on negotiating parties a duty of good faith and fair dealing that has been interpreted to include significant duties of disclosure. As Friedrich Kessler and Edith Fine characterize it, “Each party is bound to disclose such matters as are clearly of importance for the other party’s decision, provided the latter is unable to procure the information himself and the nondisclosing party is aware of the fact.”17 It seems that precontractual promissory misrepresentations such as those discussed in chapter 7 would be actionable as culpa in contrahendo.18

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CHAPTER 1: INTRODUCTION

1. Most influentially, J. L. Austin, How to Do Things with Words ( J. O. Urmson & Marina Sbisà eds., 2d ed. 1975). Austin distinguishes performatives— thanking, naming, apologizing, promising—from constatives, which are assertions about the world and which we generally refer to as the “representational” dimension or as what a speech act “says.” 2. Grant Gilmore, The Death of Contract 61–93 (1974); Patrick Atiyah, Promises, Morals, and the Law 138 –215 (1981). Farnsworth, who does not fall into such reductionism, also observes that the act of promising has two separate dimensions: “First, a promise represents that the promisor has made an initial decision to do what is promised. A promise to do thus-and-so says: ‘I have decided to do thus-and-so.’ . . . Second, a promise expresses the promisor’s commitment to carry out the initial decision by doing what is promised at some future time despite a subsequent change of mind. A promise to do thus-and-so also says: ‘I will carry out my decision to do thus-and-so when the time comes even if I later change my mind and regret my decision to do it.’” E. Allan Farnsworth, Changing Your Mind: The Law of Regretted Decisions 29 (1998). Farnsworth’s emphasis in his book, however, is on the second dimension he identifies—the way that a promise expresses (or creates) a commitment. 3. Fried analyzes the mistake of viewing a broken promise as a type of lie in the

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4. 5. 6.

7. 8.

9.

10. 11.

12. 13.

first chapter of Contract as Promise. See Charles Fried, Contract as Promise: A Theory of Contractual Obligation 9 –10 (1981). Complete Fairy Tales of the Brothers Grimm 2 (Jack D. Zipes trans., Bantam Books 3d ed. 1992). And don’t forget Homer’s description of Autolykos, Odysseus’s grandfather, “who surpassed all men in thievery and the art of the oath.” Odyssey 19:395 – 96. See, e.g., T. M. Scanlon, Promises and Contracts, in The Theory of Contract: New Essays 86, 88 – 93 (P. Benson ed. 2001). The term lying promise is most often used in connection with Kant’s question, “May I, when hard pressed, make a promise with the intention not to keep it?” Immanuel Kant, Groundwork of the Metaphysics of Morals 15 (Mary Gregor trans., Cambridge Univ. Press 1998). It is not so clear, however, that Kant’s negative answer to this question rests on the fact that such a promise is a lie, and thus “lying promise” may not be the most perspicacious way to characterize Kant’s example. In order to avoid invoking Kant or provoking Kant aficionados, we generally eschew the term. Edgington v. Fitzmaurice, 29 Ch. D. 459, 483 (Ch. App. 1885). In order to avoid confusion, we use feminine personal pronouns to refer to promisors and masculine personal pronouns to refer to promisees. Because promissory fraud can be claimed as an affirmative defense, we generally speak of the party claiming promissory fraud as the “claimant,” rather than the “plaintiff.” We refer to the party alleged to have made a promissory misrepresentation as the “defendant,” with the caveat that, as we use it, the term does not denote the party’s position relative to the case as a whole but only relative to a claim of promissory misrepresentation. See, e.g., Oliver W. Holmes, The Path of the Law, 10 Harv. L. Rev. 457 (1897), reprinted in 110 Harv. L. Rev. 991, 993 (1996 –1997) (“Manifestly, therefore, nothing but confusion of thought can result from assuming that the rights of man in a moral sense are equally rights in the sense of the Constitution and the law.”). The Colorado Supreme Court seems to have at one time employed something like the Holmesian distinction between moral and legal wrongs to reject the action for promissory fraud. Farris v. Strong, 48 P. 963, 965 (Colo. 1897) (“[A]lthough it is admitted that [the promises] were unfulfilled, and made with an intention on the part of Strong not to perform, whatever may be said of his conduct from a moral point of view, they do not, as we have seen, afford a ground for the relief sought.”). Holmes, supra note 9, at 996. For the former proposition, see id. (“In my opinion no one will understand the true theory of contract or be able even to discuss some fundamental questions intelligently until he has understood that all contracts are formal, that the making of a contract depends not on the agreement of two minds in one intention, but on the agreement of two sets of external signs—not on the parties’ having meant the same thing but on their having said the same thing.”). For the latter, see id. at 995; see also Globe Refining Co. v. Landa Cotton Oil Co., 190 U.S. 540, 544 (1903). This is how a number of commentators have understood Holmes’s dictum. See, e.g., Fried, supra note 3. Thus Simpson and Duesenberg write: “On the theory that a party to a contract assumes

Notes to Pages 5–6

the alternate duties of performing his promise or paying damages, it is logically arguable that there is not necessarily implied a promise of performance.” Lawrence B. Simpson & Richard Duesenberg, 7 Encyclopedia New York Law Contracts § 2116 (1963). But they also properly recognize that this argument does not capture the reality that “[f]rom the perspective of the promisee, he contracts for performance, not for a law suit through which he may collect damages.” Id. See also Note, Fraud—Promissory Misrepresentation—Contract without Intent to Perform, 38 Yale L.J. 544, 545 (1929). 14. 219 U.S. 219 (1911). 15. Id. at 247– 48 (Holmes J., dissenting). See also id. at 249 (“[A] false representation, expressed or implied, at the time of making a contract of labor, that one intends to perform it, and thereby obtaining an advance, may be declared a case of fraudulently obtaining money as well as any other.”). 16. See Jennifer Roback, Southern Labor Law in the Jim Crow Era: Exploitative or Competitive? 51 U. Chi. L. Rev. 1161, 1166– 68 (1984), reprinted in Labor Law and the Employment Market 217 (Richard A. Epstein & Jeffrey Paul eds., 1985). 17. 219 U.S. at 246 (Holmes J., dissenting). See also Commonwealth v. Rubin, 43 N.E. 200 (Mass. 1896) (Holmes, J.) (affirming conviction for larceny based on the defendant’s false promise); Sweet v. Kimball, 166 Mass. 332, 335 (1896) (Holmes, J.) (“The fraud intended is not . . . the failure of the defendant to keep his promise. . . . Probably it is meant . . . that there was a fraudulent misrepresentation of the defendant’s intention to keep his promises.”). 18. Holmes’s statement that a contractual duty is a prediction that one must perform or pay damages probably was formulated with an eye more to dramatic impact than to precision. Elsewhere Holmes makes it clear that he doesn’t view a legally binding promise as a promise to perform or to pay damages. For instance, he writes in The Common Law: “[T]he statement that the effect of a contract is the assumption of the risk of a future event does not mean that there is a second subsidiary promise to assume that risk, but that the assumption follows as a consequence directly enforced by the law, without the promisor’s cooperation.” Oliver Wendell Holmes, The Common Law 302 (1881). Similarly, in a letter to Sir Frederick Pollock of December 11, 1928, Holmes takes issue with “the impression that I say that a man promises either X or to pay damages. I don’t think a man promises to pay damages in contract any more than in tort. He commits an act that makes him liable for them if a certain event does not come to pass, just like his act in tort makes him liable simpliciter.” 2 Holmes-Pollock Letters 233 (Mark D. Howe ed. 1941). See also id. at 177, and generally, Joseph M. Perillo, Misreading Oliver Wendell Holmes on Efficient Breach and Tortious Interference, 68 Fordham L. Rev. 1085 (2000). 19. The exception to this statement has been courts in those jurisdictions that do not recognize promissory fraud. These courts often discuss the considerations which speak against a legal assumption that every promise represents an intention to perform. We discuss their arguments in both chapters 4 and 5. 20. While the lack of recent publications on promissory fraud and related topics can be explained in part by the demise of the case note and the academy’s discovery of new topics that did not involve it in black-letter law, the difference between the number of publications in the first sixty years of the twentieth century and the past fifty years is nonetheless

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marked. A partial bibliography is as follows: Solon D. Wilson, Note, Fraud—Deceit— Purchase of Goods on Credit not Intending to Pay for Them—Implied False Representations, 43 Cent. L.J. 266 (1896); William C. Dennis, Notes on a Disputed Point in the Law of Deceit, 2 Tulane L. Rev. (So. L.Q.) 287 (1917); Francis M. Burdick, Deceit by False Statement of Intent, 3 So. L.Q. 118 (1918); Note, Torts—Deceit—Misrepresentations as to Intention, 1 Wash. L. Rev. 218 (1926); Harold J. Sporer, Note, Fraud—To What Extent Fraud May Be Predicated upon a Broken Promise, 3 Wis. L. Rev. 346 (1926); Note, Criminal Law—Larceny—Distinction Between Common Law Larceny and Obtaining Money by False Pretenses Notwithstanding Statute Treating Both as One Crime, 27 Col. L. Rev. 737 (1927); Note, Criminal Law—Owner’s “Intent” to Pass “Title” Precluded Conviction for Larceny, 36 Yale L.J. 1020 (1927); Note, Larceny—By Trick or Device, 22 Ill. L. Rev. 779 (1928); Note, Larceny—Common Law Larceny by Trick and Device—Necessity for Parting with Title, 13 Va. L. Rev. 655 (1928); Note, Larceny Generically, and the Office of a Bill of Particulars in Respect to an Indictment, 1 St. Johns L. Rev. 176 (1928); Note, Fraud—Promissory Misrepresentation—Contract without Intent to Perform, 38 Yale L.J. 544 (1929); Note, Fraud— Misrepresentation of Intention as Actionable Fraud, 78 U. Pa. L. Rev. 788 (1930); Herbert Horn, Misrepresentation of Intention to Pay, 35 Dickinson L. Rev. 27 (1930); Note, Fraud—Promise with Present Intent not to Perform, 18 St. Louis L. Rev. 166 (1932); Note, Bankruptcy—Non-Dischargeable Debt—Purchase of Goods with No Intent to Pay Therefore as Obtaining Property by False Pretense or False Representation, 17 Minn. L. Rev. 658 (1933); Note, Fraud—Promise without Intention to Perform as Constituting Fraud, 17 Minn. L. Rev. 668 (1933); Note, Sales—Fraud—Lack of Reasonable Expectation of Ability to Pay, 46 Harv. L. Rev. 1344 (1933); Note, Contracts—Fraud—Implied Representation of Solvency, 32 Mich. L. Rev. 407 (1934); W. Page Keeton, Note, Fraud—Statements of Intention, 15 Tex. L. Rev. 185 (1937); Note, Deceit—Defenses—Action on False Promissory Representation not within Statute of Frauds, 50 Harv. L. Rev. 694 (1937); John Hamshaw, Note, Fraud and Deceit—Promissory Statements—Present Intent not to Perform, 3 Mo. L. Rev. 69 (1938); Note, Fraud—Misrepresentation of Intention—Promise Unenforceable as Such, 16 Tex. L. Rev. 407 (1938); Note, Fraud—Promissory Representations—Parol Evidence Rule, 16 Tex. L. Rev. 408 (1938); Note, The Legal Effects of Promises Made with Intent not to Perform, 38 Colum. L. Rev. 1461 (1938); Margaret C. Johnson, Note, Contracts—Fraud—Misrepresentation of State of Mind—Parol Evidence, 17 N.C.L. Rev. 32 (1938 –1939); Clarence C. Kunc, Note, Fraud—Misrepresentations of Intent, 19 Neb. L. Bull. 39 (1940); Note, False Pretenses—Obtaining Services by Fraudulent Promise of Compensation Made a Misdemeanor, 53 Harv. L. Rev. 893 (1940); Walter Bliss, Note, Fraud Predicated on a Promise Made with Present Intent not to Perform, 13 Rocky Mountain L. Rev. 263 (1941); R. I. Lipton, Note, Torts—Actionable Fraud—Promissory Representation, 24 N.C.L. Rev. 49 (1945); Weymouth G. Lowe, Case Note, Promises Relating to Future Conduct as Misrepresentations of Fact in the Law of Fraud, 15 J. of the Bar Assoc. of Kan. 305 (1947); Herve Racivitch Jr., Comment, False Statement of Intention as an Element of Fraud in Criminal Case, 21 Tulane L. Rev. 639 (1947); Claude B. Brown, State of Mind— A Material Fact, 1 Ark. L. Rev. 156 (1947); W. David Curtis, A State of Mind: Fact or Fancy? 33 Cornell L.Q. 351 (1948); Thomas H. Galey, Note, Fraud: Promises Made without Intention to Perform, 2 Okla. L. Rev. 365 (1949); J. S. Sellingsloh, Note, Fraud—Mis-

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representation of Intention to Perform Contractual Promise, 27 Tex. L. Rev. 389 (1949); Robert Wm. Garland, Is Insolvency at Time of Entering into a Contract Fraud in Esse? 11 U. Pitt. L. Rev. 666 (1950); René Pastorek, Comment, Obtaining by False Promises: Proposed Statute, 5 U. Fla. L. Rev. 63 (1952), reprinted in 6 Loyola L. Rev. 145 (1952); Gerald H. Goldberg, Note, Does a Promise Made without Intent to Perform It Constitute Fraud in Pennsylvania? 57 Dickinson L. Rev. 143 (1953); Note, The Case for a Law of Promissory Fraud, 53 Colum. L. Rev. 407 (1953); Arthur R. Pearce, Theft by False Promises, 101 U. Pa. L. Rev. 967 (1953); Elliot D. Pearl, Note, Criminal Law: False Promise as False Pretenses, 43 Cal. L. Rev. 719 (1955); Justin Sweet, Promissory Fraud and the Parol Evidence Rule, 49 Cal. L. Rev. 877 (1961); Evan M. Zuckerman, Note, Promissory Fraud in Tennessee: A Wrong without a Remedy, 10 Memph. St. U. L. Rev. 308 (1980); Michael J. Polelle, An Illinois Choice: Fossil Law or an Action for Promissory Fraud? 32 DePaul L. Rev. 565 (1983); George N. Stepaniuk, Note, The Statute of Frauds as a Bar to an Action in Tort for Fraud, 53 Fordham L. Rev. 1231 (1985); Raymond R. Nolasco, Promissory Fraud in Illinois: What Is a Scheme to Defraud? 8 N. Ill. U.L. Rev. 485 (1988); R. Alston Hamilton, Comment, Tennessee’s Long-Awaited Adoption of Promissory Fraud: Steed Realty v. Oveisi, 59 Tenn. L. Rev. 325 (1992); Joe Manuel and Stuart James, Tennessee’s Theories of Misrepresentation, 22 Memph. St. U.L. Rev. 633 (1992); Lynn C. Tyler, Promissory Misrepresentations: Are They, and Should They Be, Actionable as Constructive Fraud? 39-OCT Res Gestae 17 (1995). 21. The following casebooks fail to discuss promissory fraud: James A. Henderson et al., The Torts Process (6th ed. 2003); Dan B. Dobbs & Paul T. Hayden, Torts and Compensation: Personal Accountability and Social Responsibility for Injury (4th ed. 2001); Marc A. Franklin & Robert L. Rabin, Tort Law and Alternatives (7th ed. 2001); Arthur Best & David W. Barnes, Basic Tort Law (2003); Dominick Vetri, Tort Law and Practice (2d ed. 2002); Aaron D. Twerski & James A. Henderson Jr., Torts (2003); John D. Calamari et al., Cases and Problems on Contracts (3d ed. 2000); Steven J. Burton, Principles of Contract Law (2d ed. 2001); Randy E. Barnett, Contracts (3d ed. 2003). The following casebooks give a cursory discussion of promissory fraud: Harry Shulman et al., Law of Torts (4th ed. 2003); Robert E. Keeton et al., Tort and Accident Law (3d ed. 1998); Victor E. Schwartz et al., Prosser, Wade, and Schwartz’s Torts (10th ed. 2000); Dawson et al., Contracts (7th ed. 1998); Farnsworth et. al., Contracts (6th ed. 2001); Lon L. Fuller & Melvin Aron Eisenberg, Basic Contract Law (7th ed. 2001); Arthur Rosett & Daniel J. Bussel, Contract Law and Its Application (6th ed. 1999); Charles L. Knapp et al., Problems in Contract Law (5th ed. 2003); Brian A. Blum & Amy C. Bushaw, Contracts (2003). An expanded discussion now appears in Edward J. Murphy, Richard E. Speidel & Ian Ayres, Studies in Contract Law 519 (6th ed. 2003). Of four Yale Law School professors surveyed who teach first-year Contracts, only two mention promissory fraud. Of three professors who teach first-year Torts, none teaches it. Further evidence of inattention to the action is the fact that only about half of all promissory-fraud cases get classified under the correct West Key Number. The following Boolean search in the ALLCASES and ALLCASES-OLD Westlaw databases, run in the spring of 2001, produced 283 cases, approximately 279 of which concerned promissory fraud: “sy,di(evidence /s “intent not to perform” “without intent to perform” “no intent

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to perform” “intention not to perform” “without intention to perform” “no intention to perform” “promissory fraud”).” Running the same search, but excluding the promissoryfraud key number (i.e., adding “% 184k12” to the Boolean search) resulted in 135 cases. This would indicate that approximately 48 percent (135 of 279) of promissory-fraud cases are not classified under the most relevant key number. 22. See Ian Ayres & Barry Nalebuff, The Wrong Ticket to Ride, N.Y. Times, March 24, 2004, at A29. 23. The forty-four states were: Alabama, Arizona, Arkansas, California, Colorado, Connecticut, Delaware, Florida, Georgia, Idaho, Illinois, Iowa, Kansas, Kentucky, Louisiana, Maryland, Massachusetts, Michigan, Minnesota, Mississippi, Missouri, Montana, Nebraska, New Hampshire, New Jersey, New Mexico, New York, North Carolina, North Dakota, Ohio, Oklahoma, Oregon, Pennsylvania, South Carolina, South Dakota, Tennessee, Texas, Utah, Vermont, Virginia, Washington, West Virginia, Wisconsin, and Wyoming. 24. In fact, we argue in chapter 4 that it is enough that the promisee be protected by full reliance damages. So long as he knows that his reliance interest is protected, the promisee will generally be indifferent, at the time of promising, as to whether or not the promisor intends to perform. 25. Indeed, legal protections against all fraud in the inducement play this role. If expectation damages were fully implemented, promisees would be indifferent as to whether promisors intentionally misrepresented facts as a precursor to contracting. 26. In fact, the two doctrines are jointly raised in one species of promissory fraud: where the promisor enters an initial contract only with the intent later to extort a bad-faith modification. See infra chapter 7, pp. 133 –34, 137 –38. 27. Our argument is therefore consonant with Richard Craswell’s observations about the hidden property rules that can be found in a variety of contract doctrines and how they usefully substitute for expectation damages. See Richard Craswell, Property Rules and Liability Rules in Unconscionability and Related Doctrines, 60 U. Chi. L. Rev. 1, 32–34 (1993). 28. Restatement (Second) of Torts § 530 cmt. c (1976). But see Restatement (Second) of Contracts § 171(2) (1981), which we discuss in infra chapter 2, note 2. 29. We have already expressed our doubts about whether this idea of a contractual promise should be attributed to Holmes. Thus our use of “Holmesian” in the text that follows should be read with implicit scare quotes. 30. For a good example of how courts can miss such subtleties, see Blake v. Paramount Pictures, Inc., 22 F. Supp. 249 (S.D. Cal. 1938) (“It is elementary that, if one promises to do one thing, or, failing, do another, no fraud can result if he made the original promise only without the intention to perform; for even if he did, he protected himself by the substitution.”). The court’s error in Blake was nicely diagnosed in a 1938 anonymous note in the Columbia Law Journal: “In answer it may be said that the promisee has agreed to accept something else for an original bona fide promise, that is he may reasonable [sic ] expect a bona fide attempt to [perform that promise]. It would seem that he may very well complain of the defendant’s fraud in making the first and main promise without intending to perform it, and that recovery ought to be allowed.” Note, The Legal Effects of

Notes to Pages 10–20

31.

32.

33. 34. 35. 36. 37. 38.

Promises Made with Intent not to Perform, supra note 20, at 1456. Put options might also give rise to promissory fraud concerns. Imagine the promisor who buys formal wear (with a satisfaction-guaranteed return policy) with the intent of returning the garment after wearing it to the prom. While the call option fraud concerned a promisor who intended not to exercise, the put option fraud concerns a purchaser with a put who never intends not to exercise. See, e.g., Yoon v. Alaska Real Estate Comm’n, 17 P.3d 779 (Alaska 2001); H & H Distrib., Inc. v. BBC Intern., Inc., 812 P.2d 659 (Colo. Ct. App. 1990); Bulbman, Inc. v. Nevada Bell, 825 P.2d 588 (Nev. 1992); Beckendorf v. Beckendorf, 457 P. 2d 603 (Wash. 1969). See, e.g., Wolk v. Churchill, 696 F.2d 621, 626 (8th Cir. 1982) (Under Missouri law, uncertainty as to the likelihood of future performance is not enough to sustain a claim of promissory fraud.); German National Bank v. Princeton State Bank, 107 N.W. 454 (Wis. 1906). We discuss such cases further in chapter 3, infra pp. 52 – 55. See, e.g., Leisure Am. Resorts, Inc. v. Knutilla, 547 So. 2d 424 (Ala. 1989). We discuss such cases further in chapter 3, infra pp. 52 –53. http://customcritical.fedex.com/us/about/whentouseus.shtml (last visited Aug. 28, 2001). Matthew 5:33. See also James 5:12. Farnsworth, supra note 2. Leisure American Resorts, Inc. v. Knutilla, 547 So. 2d 424 (Ala. 1989). We recognize that motive evidence, while potentially probative and sometimes necessary, should not suffice to satisfy the representation, veracity, or scienter inquiry. As a matter of principle, proving motive can only be a step on the way to proving intent, for individuals often have a motive to do wrong without intending to do so. In addition, motive evidence is considerably less probative in cases in which the promisor allegedly misrepresented the probability of performance (rather than her intention) and where the misrepresentation in question is alleged to have been reckless, rather than intentional.

CHAPTER 2: HOW TO SAY THINGS WITH PROMISES

1. See, e.g., Chedick v. Nash, 151 F.3d 1077, 1083 (D.C. Cir. 1998) (“It is equally plain that every party to a contract necessarily represents that it intends to perform all its obligations, whether implicit or explicit.” [citing Restatement (Second) of Contracts § 1 (1979)]); Old Southern Life Ins. Co. v. Woodall, 326 So. 2d 726, 729 (Ala. 1976) (“When a promise is made the promisor expressly or by necessary implication states that he then has a present intention to perform.”); Cicone v. URS Corp., 183 Cal. App. 3d 194, 203 (Cal. Ct. App. 1986) (“[A] promise to do something necessarily implies the intention to perform.”); Berkeley Bank for Coops. v. Meibos, 607 P.2d 798, 804 (Utah 1980) (“The promise itself is regarded as a representation of a present intention to perform.” [quoting Harper & James, 1 The Law of Torts 571–72 (1956)]). 2. Restatement (Second) of Torts § 530, cmt. c (1977). The Second Restatement of Contracts takes a more nuanced view, stipulating that “[i]f it is reasonable to do so, the promisee may properly interpret a promise as an assertion that the promisor intends to perform the promise.” Restatement (Second) of Contracts § 171(2) (1981). The com-

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3. 4.

5.

6.

7.

8.

ments indicate that when the drafters inserted the “if reasonable to do so” proviso, they were thinking of situations where “the promisor has disclosed his intention not to perform or [where] performance is known not to be within his control.” Id. cmt. b. Cf. Restatement (First) of Contracts § 473 (1932) (“A contractual promise made with the undisclosed intention of not performing it is fraud.”). See, e.g., J. L. Austin, How to Do Things with Words (J. O. Urmson & Marina Sbisà eds., 2d ed. 1975); John Searle, Speech Acts: An Essay in the Philosophy of Language (1969). In the philosophy of language, the term to commit oneself has, in recent years, come to have a broader meaning, applying to the normative force of a belief or intention. For the purposes of this book, we use the term in a narrower, perhaps more familiar sense, as it applies only to the normative force of promising. Here we part company with theorists like P. S. Atiyah, whose evidentiary theory of promises denies that promises are anything other than predictions and who argues that statements of fact about the future that are not bargained for and are relied upon should create the same legal liability as a promise. See Patrick Atiyah, Promises, Morals and the Law 138 –215, esp. 161– 64 (1981). For the same reason, we would take issue with much of Farnsworth’s characterization of this dimension of promising, which to our eyes fails adequately to distinguish between commitment as prediction and commitment as undertaking. E. Allan Farnsworth, Changing Your Mind: The Law of Regretted Decisions 29, 32– 34 (1998); but see id. at 36 – 42 (posing the question of why promises should create commitments). Since we do not advocate a moral theory of legal promissory obligation, we fall among those whom Richard Craswell identifies as emphasizing the norm-creating powers of promises. The Philosophy of Promising, 88 Mich. L. Rev. 489, 497– 98 (1989). For an introduction to this idea of meaning, see Robert Brandom, Making It Explicit: Reasoning, Representing, and Discursive Commitment 67–140 (1994); Wilfrid Sellars, Inference and Meaning, 62 Mind 313 (1953), reprinted in Pure Pragmatics and Possible Worlds: The Early Essays of Wilfrid Sellars (J. Sicha ed., 1980). On the whole, we emphasize only two sorts of entailments that promises have—committing the promisor to doing something and saying that something is the case. This should not be read to mean that these are the only philosophically interesting entailments that a promise has. For example, A’s utterance of the words “I promise to x” entails that A has a new sort of reason to x—a fact that is worthy of much attention. See Joseph Raz, “Promises and Obligations,” in Law, Morality, and Society: Essays in Honour of H. L. A. Hart (P. M. S. Hacker & J. Raz, eds. 1977). We are particularly confident that in everyday language practice people who promise to x normally intend to x at the time of promising and that this is the common objective meaning of a promise. It is slightly more difficult to conclude that a given promisor intends to say with her promise that she intends to x, though this is the objective meaning of her words. We turn to this scienter issue in the next chapter. For the moment, our topic is the objective or common meaning of the act of promising, an account of which is the precondition of explaining how a given promisor can intend to say something other than the objective meaning of her promise. Indeed, because there is an implicit norm that one’s representations are true, REP1 also has a normative effect: by making REP1, A takes on a certain normative status according

Notes to Pages 22–23

9.

10. 11. 12. 13.

to which she will be subject to censure and/or other sanctions if she does not intend to x. This is where the distinction between performative and constative, which is extremely useful as far as it goes, begins to lose its meaning. We are unaware of any case considering a promisor who explicitly disavows any representation of an intention to perform while still committing herself to doing so. The Second Restatement of Contracts, which runs together what the promise says about intent with justified reliance on that representation, instructs that a promisee’s reliance on an intention to perform “is not justified if the promisor has disclosed his intention not to perform.” Restatement (Second) of Contracts § 171 cmt. b (1981). This is not quite the same as disclaiming any representation as to intent, and the rule seems to be aimed at cases like where an oral promise (and thus representation of intent) is belied by the written terms of a contract. See Mellon Bank Corp. v. First Union Real Estate, 951 F.2d 1399, 1412 (3d Cir. 1991). There is, however, a large class of “take or pay” contracts, where, for example, a promisor promises to buy a certain quantity for a certain price (or pay an alternative price for not buying) without representing a present intent of actually buying. See, e.g., Parker v. Twentieth Century–Fox Film Corp., 3 Cal. 3d 176 (Sup. Ct. 1970); In the Matter of Great Lakes Carbon Corp., 82 F.T.C. 1529 (1973); Texas Eastern Transmission Corp. v. Amerada Hess Corp., 145 F.3d 737 (5th Cir. 1998). For discussion of “take or pay” contracts more generally, see Victor P. Goldberg & John R. Erickson, Quantity and Price Adjustment in Long-Term Contracts: A Case Study of Petroleum Coke, 30 J.L. & Econ. 369 (1987); and Scott E. Masten & Keith J. Crocker, Efficient Adaptation in Long-Term Contracts: Take-or-Pay Provisions for Natural Gas, 75 Am. Econ. Rev. 1083 (1985). We discuss the relationship between option contracts and blank and opaque promises below. Oliver Wendell Holmes, The Path of the Law, 10 Harv. L. Rev. 457 (1897), reprinted in 110 Harv. L. Rev. 991, 995 (1996 –1997). See id. at 991– 97. See supra chapter 1 note 18. As earlier editors of American Jurisprudence Second noted, courts do not readily recognize the difference. See 37 Am. Jur. 2d Fraud and Deceit § 36 (1968) (“The expression ‘no intention of paying’ has frequently been used . . . as synonymous with an ‘intention not to pay,’ although it has been held that they are not synonymous and that the latter expression, or its equivalent, is proper.”). A few courts have recognized the distinction. See Bauer v. Adams, 550 S.W.2d 850, 853 – 54 (Mo. Ct. App. 1977) (“[P]laintiffs’ direct evidence of intent was the testimony of defendant that he never intended to guarantee repayment and did not do so. This is the only direct evidence of intent and is contrary to the necessary finding of a present intent not to perform.”); Catlin v. Warren, 16 Ill. App. 418, 423 (Ill. App. 1885) (“The instruction says that ‘if a merchant buys goods upon credit, without intending to pay for them, this is a fraud.’ Whereas the rule, which we conceive to be the correct one, is, that if any vendee purchases goods with the preconceived design, or with the intention at the time, never to pay for them, the purchase is fraudulent. By that embraced in the instruction, a mere negative or indifferent state of mind as respects payment, constitutes the sale fraudulent; while by the other, there must be a positive and predetermined intention never to pay for the goods.”); Chamberlain v.

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14.

15. 16. 17.

18.

Hoogs, 67 Mass. 172, 174 –75 (Mass. 1854) (“Not intending, or having no intention, to do a certain act, is substantially different from intending, or having an intention, not to do it. The former expression imports the mere nonexistence of an intention to do the act; the latter imports the actual existence of an intention not to do it.”). But see Bissett v. PlyGem Indus., Inc., 533 F.2d 142, 145 (5th Cir. 1976) (apparently equating no intent to perform with intent not to perform); Home Seekers’ Realty Co. v. Menear, 135 So. 402, 402–03 (Fla. 1931) (same). We are aware of only one commentator who has made anything of the difference between not intending to and intending not to. Note, The Case for a Law of Promissory Fraud, 53 Colum. L. Rev. 407 (1953) (arguing that the crime of false promise should be limited to where there is “proof of a positive and almost unconditional intent not to perform”). As far as we know, we are the first to propose the idea of blank and opaque promises. Pearce suggests that some legally sophisticated promises might represent not an intent to perform but an intent “to perform or to respond in damages in accordance with a measure of damages understood by both parties.” Arthur Pearce, Theft by False Promises, 101 U. Pa. L. Rev 967, 1010 (1953). This sort of representation would correspond to the Holmesian idea that a contractual promise is in fact a promise to perform or pay damages. And it would say more than an opaque promise, which supplies information only about what the promisor may not intend, not about what her intention actually is. Pearce also anticipates our account in suggesting that the courts treat the categorical interpretation as a default and allow “[t]he legally sophisticated [to] adjust the language of their contracts accordingly by spelling out the special meaning which the parties intend.” Id. While Pearce deserves credit for recognizing the mutability of the categorical interpretation, we wonder whether the sort of representation he discusses is relevant. Many Holmesian promisors don’t intend to perform or pay damages, but to pay damages only if the law compels them to do so. Singhal and Subrahmanyan gesture toward another way of getting at a similar idea. Among the elements of deceit is the claimant’s actual reliance on the misrepresentation. Singhal and Subrahmanyan take this point and correctly conclude that where there is no reliance on a representation of intent, there can be no promissory fraud. “If the essential feature relied on is the promise, without reference to the intention of the party making it, there is no fraud.” Singhal & Subrahmanyan’s Indian Contract Act, vol. 1, 438 (Justice K. Shanmukham ed., 4th ed. 1999). Where we approach blank and opaque promises from the side of what gets represented, they might come at the same idea from the side of actual reliance. Unfortunately, Singhal and Subrahmanyan don’t elaborate further on this suggestion and don’t cite any cases that take that approach. Hillcrest Ctr., Inc. v. Rone, 711 So. 2d 901 (Ala. 1997). Id. at 906. See, e.g., Lamoureux v. Burrillville Racing Assoc., 161 A.2d 213, 215 (R.I. 1960). For more on the illusory promise doctrine, see Restatement (Second) of Contracts, § 77 (1981); Melvin A. Eisenberg, Probability and Chance in Contract Law, 45 UCLA L. Rev. 1005 (1998); Val Ricks, In Defense of Mutuality of Obligation: Why “Both Should Be Bound, or Neither,” 78 Neb. L. Rev. 491 (1999). For example, a promise might also communicate that the promisor means to create a

Notes to Pages 25–30

legally binding agreement and intends to sue for breach should the other party fail to perform. 19. See U.C.C. § 2– 615 (1977); Restatement (Second) of Contracts § 261 (1981). 20. John Rawls, A Theory of Justice 345 (1971) (emphasis added). 21. Infra pp. 00– 00. 22. Respondents are much more likely to characterize even precontractual price shifts driven by opportunity cost as unfair. See Daniel Kahneman, Jack Knetsch & Richard Thaler, Fairness as a Constraint on Profit Seeking: Entitlements in the Market, 76 Am. Econ. Rev. 728 (1986). In efficiency terms, risk-averse parties are likely to bargain differently about the possible advent of good news and bad news. Making contractual enforcement conditional on bad but not on good news, leads to a more equitable and efficient sharing of both the bad and the good shocks. Unenforceable bad-news conditions force the promisee to share some of the burden of the bad news; enforceable good-news conditions force the promisor to share some of the benefits of the good news with the promisee. 23. Revlon v. MacAndrews & Forbes, 506 A.2d 173, 182 (Del. 1986) (When a sale is inevitable, the target’s board of directors is required to act as would “auctioneers charged with getting the best price for the stockholders at a sale of the company.”) 24. 815 P.2d 283 (Haw. 1980). 25. Id. at 289. 26. An implicit representation of intent to perform even if someone else makes a better offer also resonates with the idea of tortuous interference with contract. See Fred S. McChesney, Tortious Interference with Contract Versus “Efficient” Breach: Theory and Empirical Evidence, 28 J. Legal Stud. 131 (1999). A promisor who intends to breach in the event of a better offer is from the outset open to the very type of interference which the law (at times) labels tortious. 27. See, e.g., Restatement (Second) of Torts § 525 (1977). 28. This aspect of promising is most emphasized by those who want to assimilate contractual obligations to tortlike obligations. Atiyah, for instance, writes: “[P]eople who make promises very often—perhaps usually—do so because they want to get something from the promisee which they can only get by doing so. . . . [P]romises are given to induce people to act upon them.” Atiyah, supra note 5, at 143 – 44. But it is recognized even by those who prioritize the moral dimension. Thus Charles Fried explains the desirability of the practice of promising as follows: “By [making nonoptional a course of conduct that would otherwise be optional for me] I can facilitate the projects of others, because I can make it possible for those others to count on my future conduct, and thus those others can pursue more intricate, more far reaching projects. If it is my purpose, my will that others be able to count on me in the pursuit of their endeavors, it is essential that I be able to deliver myself into their hands more firmly than were they simply to predict my future conduct. . . . We need a device to permit a trade over time: to allow me to do A for you when you need it, in the confident belief that you will do B for me when I need it.” Charles Fried, Contract as Promise: A Theory of Contractual Obligation 13 (1981). See also Dori Kimel, From Promise to Contract: Towards a Liberal Theory of Contract 20 –21 (2003).

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29. For the moment we are modeling the promisee’s reliance costs as a constant. In a more detailed model, CB would be replaced by a continuous choice variable which would be a function of the promisee’s beliefs about Pp. The greater the probability that the promisor will perform, the greater the costs a promisee can rationally incur in reliance on her performance. In the simplest cases, for example, where none of the reliance costs is an either-or proposition, the value of CB might be represented by a linear function (K)(Pp). 30. This model could be generalized in a variety of ways, for example, by including a probability of promisee might not perform, by including additional costs the promisee will incur if the promisor breaches, or by including a probability that the court will not enforce the contract if the promisor breaches. But our core result would continue to hold— promisees care about the probability of promisor’s performance when expected damages are subcompensatory, and the minimum probability that would induce their participation will be a function of the expected profits if the promisor does or does not perform. The model could also be enriched by dropping the assumption that the promisee is fully rational and integrating empirical data on common cognitive biases in assessing risk. For an example of how these empirical results can be applied to the promisee’s decision whether to rely, see Larry T. Garvin, Adequate Assurance of Performance: Of Risk, Duress, and Cognition, 69 U. Colo. L. Rev. 71, 140 –70 (1998). A bias toward underestimating risk would lower the promisee’s perceived participation constraint. But there may be other countervailing biases—like a bias against nonperformance even with full compensation. Interesting as it would be to tease these out, once again our basic result below would hold. Everyday experience simply suggests that promisees care about the probability of performance at the very least when damages are subcompensatory. 31. There are also situations where the promisor knows more than the promisee about the other variables that go into determining his participation constraint. The effect of these informational imbalances is briefly considered in chapter 7, infra pp. 163 –65. 32. In a more complicated model that includes litigation costs, to put the promisee in the same position as if performance had occurred would require a court to reject the American Rule and to compensate the promisee for those costs as well. 33. We discuss in more detail the various reasons why damages can be subcompensatory in chapter 4, infra pp. 71 – 73. 34. (80  60)/(100  60)  .5. 35. (80  90)/(100  90)  10/10  1. 36. For philosophical accounts of this fact, see Brandom, supra note 6, at 253 –74; Donald Davidson, Actions, Reasons, and Causes, 60 J. Phil. (1963), reprinted in Essays on Actions and Events 3 (1980). For a game-theoretical account, see Joseph Farrell & Matthew Rabin, Cheap Talk, 10 J. of Econ. Persp. 103, 110 –16 (1996). The Supreme Court recognized this fact in Mutual Life Insurance Co. v. Hillman, 145 U.S. 285 (1892), when it held that a person’s earlier intent to do some act may be used as evidence that she later did it. Farnsworth, in his book Changing Your Mind, briefly discusses the fact that a promise expresses an intent to perform, and he gets this point just right: “The first element of a promise, a representation that a decision has been made, is a statement about the promisor’s state of mind at the time of the promise. Because this initial decision is based on the promisor’s existing preferences, it affords some basis for planning.” Farnsworth,

Notes to Pages 35–40

supra note 5, at 29 – 30. Unfortunately, Farnsworth doesn’t focus his analytic skills on this dimension or go beyond familiar promissory-fraud doctrine. Id. at 30. 37. One might reply to these examples by insisting that they are really about intentions to try to win the gold or to quit smoking. Whether there’s an important difference between intending to do something and intending to try to do it is an interesting question. But nothing in the law of promissory fraud turns on it. However one analyzes the statement, it is, among other things, a way of providing information about the probability of performance. 38. The phrase “that sort of intention” in the above definition means not only an intention to do that sort of thing but also an intention that may be permissibly conditioned, such as Sally’s nonsalient bad-news conditional intent to deliver the pork rinds to Burt only if gas prices remain low. 39. http://customcritical.fedex.com/us/about/whentouseus.shtml (last visited Aug. 28, 2001). 40. LoJack Corporation reports: “Vehicles equipped with LoJack have a 90% recovery rate and are typically recovered within 24 hours. In fact, police using LoJack have recovered over 50,000 vehicles and one billion dollars in assets.” See Press Release, LoJack Corp., LoJack Finds that Imported Sedans are Most Susceptible to Theft, http://www.lojack. com/about/072302release.htm (last visited July 24, 2002). 41. In a November 2001 news release, the St. Francis Heart Center of Roslyn, N.Y., reported: “Since the Department of Health began compiling mortality data in 1995, St. Francis Hospital performed more angioplasty cases than any other hospital in New York State. During the three-year period, the Hospital performed a total of 6,518 angioplasty procedures. The Hospital’s risk adjusted mortality rate was 0.51 percent compared to a statewide average of 0.92 percent.” Press Release, St. Francis Hospital, St. Francis Hospital Leads NY State in Coronary Angioplasty—Department of Health Releases New York State Angioplasty Data (Nov. 30, 2001), available at http://www.stfrancisheartcenter.com/ news/index.html (last visited March 15, 2002). 42. We can imagine a rationale for maximum definite-probability promissory representations as well. These would be promissory representations that the probability of performance is no greater than some M, i.e., that Pp M. Such assurances might be required where damages are supercompensatory, that is, where the promisee prefers that the promisor breach her promise. Our argument in chapter 4 for enforcing promissory representations with the law of fraud would not apply to these sorts of representation, since where damages are supercompensatory, there is no market mechanism to guarantee that contracts are value creating. 43. Readers familiar with the existing law of fraud might at this point wonder whether we are aware of the traditional rule that a prediction or statement of probability may not be the basis for an action in fraud. We are and explain why we think that rule is wrong in chapter 7, infra pp. 145 – 48. 44. We discuss the advantages of a default representation of an intent to perform as opposed to a default definite-probability representation in chapter 5, infra pp. 99 – 105. 45. While it is true that the “absolutely, positively” advertisement by FedEx suggested that performance was so likely that it was safe to rely on a package being delivered in time,

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FedEx explicitly disavows that message in its shipping contract, which includes an express limited-liability clause along with the option of increased insurance for lost or delayed packages. As a consequence, FedEx will not necessarily be held liable for a greater sum upon the failure to deliver a package in a timely fashion. See Federal Express v. Paris Bus. Forms, Inc., 557 A.2d 724 (Pa. 1989). 46. Ex parte Lumpkin, 702 So. 2d 462 (Ala. 1997), reversing Green v. Lumpkin, 702 So. 2d 459 (Ala. Civ. App. 1996). 47. Green v. Lumpkin, 702 So. 2d at 460. 48. Id. at 461. 49. Ex parte Lumpkin, 702 So. 2d at 467. 50. To be more precise, this is the legal meaning of a fully warranting promise. So long as the promisor has a reasonable belief that her representation is not false, she will not be held liable for fraud, even if in fact Pp  Pp*. 51. Restatement (Second) of Contracts § 153 (1981). 52. We further discuss the relationship between promissory fraud for semiwarranting representations and other doctrines in contract law in chapter 5, infra p. 102, and in chapter 7, passim. CHAPTER 3: FALSEHOOD AND RESPONSIBILITY

1. The distinctions among the representation, veracity, and scienter inquiries are implicit in the Second Restatement’s requirement that to be liable for deceit, the speaker must “fraudulently make[ ] a misrepresentation.” Restatement (Second) of Torts § 525 (1979). A speaker makes a misrepresentation only if she says something and if what she says is false—the questions of the representation and veracity inquiries. A speaker does so fraudulently only if she knows that her representation is false or makes it recklessly. Id. §§ 526, 527. This is the subject of the scienter inquiry. See also W. Page Keeton et al., Prosser and Keeton on Torts § 105, at 728 (5th ed. 1984) (listing the first two elements of deceit as “[a] false representation made by the defendant” and “[k]nowledge or belief on the part of the defendant that the representation is false—or, what is regarded as equivalent, that he has not a sufficient basis of information to make it”). 2. Most, but not all, other forms of deceit. Nonpromissory misrepresentations of intention have long been recognized as actionable forms of deceit. We briefly discuss them in chapter 7, infra pp. 143 –45. 3. The draft Third Restatement of Torts shuffles the categories but recognizes the connection between, in our terms, intent and knowledge. Under the draft Restatement definitions, “intent” can be established by either purpose or knowledge. See Restatement (Third) of Torts: Liab. Physical Harm § 1 cmt. c (Tentative Draft No. 1, 2001) (“A purpose to cause harm makes the harm intentional even if harm is not substantially certain to occur. Likewise, knowledge that harm is substantially certain to result is sufficient to show that the harm is intentional even in the absence of a purpose to bring about that harm.”). 4. See, e.g., McCrary v. Barrack, 217 B.R. 598, 606 (B.A.P. 9th Cir. 1998); Northwest Airlines, Inc. v. Astraea Aviation Servs., Inc., 111 F.3d 1386, 1393 (8th Cir. 1997); Bower v.

Notes to Page 48

Weisman, 674 F. Supp. 113, 118 (S.D.N.Y. 1987); Durkee v. Goodyear Tire & Rubber Co., 676 F. Supp. 189, 193 (W.D. Wis. 1987), Hanover Modular Homes of N. La, Inc. v. Scottish Inns of Am., Inc., 443 F. Supp. 888, 892 (W.D. La. 1978); Owens v. Am. Refuse Sys., Inc., 536 S.E.2d 782, 786 (Ga. Ct. App. 2000); Miller v. Fairchild Indus., Inc., 629 A.2d 1293, 1302 (Md. Ct. Spec. App. 1993); Lane v. Fabert, 533 N.E.2d 546, 551 (Ill. App. Ct. 1989); Basden v. Mills, 472 P.2d 889, 894 (Okla. 1970); Dailey Co. v. Am. Inst. of Mktg. Sys., Inc., 183 S.E.2d 444, 446 (S.C. 1971); Stacks v. Saunders, 812 S.W.2d 587, 593 (Tenn. Ct. App. 1990); Tex. Employers’ Ins. Ass’n. v. Baeza, 552 S.W.2d 862, 864 (Tex. Civ. App. 1977). 5. See, e.g., Chedick v. Nash, 151 F.3d 1077, 1081– 83 (D.C. Cir. 1998); Morgan v. Inter-Continental Trading Corp., 232 F. Supp. 444, 450 – 52 (E.D. Wis. 1964); Beltz v. Atlanta Coachworks Corp., 323 S.E.2d 901, 902– 03 (Ga. Ct. App. 1984); Touche Ross, Ltd. v. Filipek, 778 P.2d 721, 726 (Haw. Ct. App. 1989); Kepler v. WHW Mgmt., Inc., 825 P.2d 1122, 1132, 1134 –35 (Idaho Ct. App. 1992); Jim-Bob, Inc. v. Mehling, 443 N.W.2d 451, 459 – 60 (Mich. Ct. App. 1989); Vandeputte v. Soderholm, 216 N.W.2d 144, 146 – 47 (Minn. 1974); Henty Constr. Co. v. Hall, 783 S.W.2d 412, 415, 417 (Mo. Ct. App. 1989); Century Marine, Inc. v. Vaglica, 27 S.W.3d 703, 709 (Tex. App. 2000); Berkeley Bank for Coops. v. Meibos, 607 P.2d 798, 801, 804 – 05 (Utah 1980). But see Beneficial Personnel Servs. of Tex., Inc. v. Rey, 927 S.W.2d 157, 169 –70 (Tex. App. 1996) (finding that a jury could have found that a defendant was reckless in making promissory representation). 6. See, e.g., Ex parte Lumpkin, 702 So. 2d 462, 466 (Ala. 1997) (“[T]here must have been at the time the representations were made an intention not to do the act promised, and such promise or opinion must have been given with the intent to deceive.”); see also US Diagnostic, Inc. v. Shelby Radiology, P.C., 793 So. 2d 714, 720 (Ala. 2000); Williams v. Williams, 786 So. 2d 477, 479 (Ala. 2000); Ex parte Grand Manor, Inc., 778 So. 2d 173, 181 (Ala. 2000); Ex parte Ledford, 761 So. 2d 990, 993 (Ala. 2000); Goodyear Tire & Rubber Co. v. Washington, 719 So. 2d 774, 776 (Ala. 1998); Hillcrest Ctr., Inc. v. Rone, 711 So. 2d 901, 905 (Ala. 1997); Palm Harbor Homes v. Crawford, 689 So. 2d 3, 9 (Ala. 1997); Gewin v. TCF Asset Mgmt. Corp., 668 So. 2d 523, 526 (Ala. 1995); Nat’l Sec. Ins. Co. v. Donaldson, 664 So. 2d 871, 876 (Ala. 1995); Pinyan v. Cmty. Bank, 644 So. 2d 919, 923 (Ala. 1994); Sealing Equip. Prods. Co. v. Velarde, 644 So. 2d 904, 908 (Ala. 1994); Johnston v. Green Mountain, Inc., 623 So. 2d 1116, 1121 (Ala. 1993); Sooudi v. Century Plaza Co., 622 So. 2d 1275, 1278 (Ala. 1993); Triple J Cattle v. Chambers, 621 So. 2d 1221, 1224 (Ala. 1993); Cabinetware, Inc. v. Birmingham Saw Works, Inc., 614 So. 2d 1034, 1037 (Ala. 1993); Udcoff v. Friedman, 614 So. 2d 436, 439 (Ala. 1993); Howard v. Wolff Broad. Corp., 611 So. 2d 307, 311 (Ala. 1992); Mason & Dixon Lines, Inc. v. Byrd, 601 So. 2d 68, 72 (Ala. 1992); Harrell v. Arrington, 595 So. 2d 1356, 1358 (Ala. 1992); Allstate Ins. Co. v. Hilley, 595 So. 2d 873, 876 (Ala. 1992); Gen. Motors Acceptance Corp. v. Covington, 586 So. 2d 178, 181 (Ala. 1991); Keith v. Witt Auto Sales, Inc., 578 So. 2d 1269, 1272 (Ala. 1991); Vance v. Huff, 568 So. 2d 745, 750 (Ala. 1990); Leisure Am. Resorts, Inc. v. Knutilla, 547 So. 2d 424, 426 (Ala. 1989); Padgett v. Hughes, 535 So. 2d 140, 142 (Ala. 1988); Selby v. Quartrol Corp., 514 So. 2d 1294, 1297 (Ala. 1987); Marshall Durbin Farms, Inc. v. Landers, 470 So. 2d 1098, 1101 (Ala. 1985); Popwell v. Greene, 465 So. 2d 384, 386 (Ala. 1985); Purcell Co. v. Spriggs Enters., Inc., 431 So. 2d 515, 519 (Ala. 1983); Clanton v.

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Bains Oil Co., 417 So. 2d 149, 151 (Ala. 1982); Craig v. Forest Inst. of Prof’l Psychology, 713 So. 2d 967, 975 (Ala. Civ. App. 1997); Shirley v. Cmty. Bank, 690 So. 2d 421, 423 (Ala. Civ. App. 1997); Mann v. Bank of Tallassee, 694 So. 2d 1375, 1381 (Ala. Civ. App. 1996); cf. Wade v. Chase Manhattan Mortgage Corp., 994 F. Supp. 1369, 1378 (N.D. Ala. 1997); In re Cornner, 191 B.R. 214, 226 (Bankr. N.D. Ala. 1995); H Enters. Int’l, Inc. v. Gen. Elec. Capital Corp., 833 F. Supp. 1405, 1422 (D. Minn. 1993); Cap Gemini Am., Inc. v. Judd, 597 N.E.2d 1272, 1279 (Ind. Ct. App. 1992); Bulbman, Inc. v. Nev. Bell, 825 P.2d 588 (Nev. 1992); Schindler v. Austwell Farmers Coop., 829 S.W.2d 283, 286 (Tex. Ct. App. 1992). 7. Ex parte Grand Manor, Inc., 778 So. 2d 173, 181 (Ala. 2000) (emphasis added); see also Wade v. Chase Manhattan Mortgage Corp., 994 F. Supp. 1369, 1378 (N.D. Ala. 1997) (requiring a showing that “the promisor had no intention of carrying out the promises, but rather had a present intent to deceive” [emphasis added] [quoting First Bank of Boaz v. Fielder, 590 So. 2d 893 (Ala. 1991)]); Ellis v. Zuck, 409 F. Supp. 1151, 1158 (N.D. Ala. 1976) (“[I]n this situation a specific intent to deceive or not to perform is an additional element.” [emphasis added]); Johnston v. Green Mountain, Inc., 623 So. 2d 1116, 1121 (Ala. 1993) (“[T]he plaintiff must show that . . . the defendant intended not to do the acts promised and intended, instead, to deceive the plaintiff.” [emphasis added]); Purcell Co. v. Spriggs Enters., Inc., 431 So. 2d 515, 519 (Ala. 1983) (requiring a showing that “promisor had no intention of carrying out the promises, but rather had a present intent to deceive” [emphasis added]); Craig v. Forest Inst. of Prof’l Psychology, 713 So. 2d 967, 975 (Ala. Civ. App. 1997) (describing “intent to deceive” as a necessary element of promissory fraud but then implying that evidence that there was an “inten[t] not to perform” could prove this element). While confusion between intent to perform and intent to deceive is rampant, there is less confusion when courts recall that it is enough to show recklessness. See Fredonia Broad. Corp. v. RCA Corp., 569 F.2d 251, 258 (5th Cir. 1978); Brungard v. Caprice Records, Inc., 608 S.W.2d 585, 588 (Tenn. Ct. App. 1980); Dizick v. Umpqua Cmty. Coll., 599 P.2d 444, 445 (Or. 1979); Sproul v. Fossi, 548 P.2d 970, 972 (Or. 1976); Elizaga v. Kaiser Found. Hosps., Inc., 487 P.2d 870, 874 (Or. 1971); Hevern v. Walter E. Heller W., Inc., 796 P.2d 1229, 1232 (Or. Ct. App. 1990). 8. See, e.g., In re Cornner, 191 B.R. 214, 226 (Bankr. N.D. Ala. 1995); Thompson v. Campbell, 845 F. Supp. 665, 682 (D. Minn. 1994); Hillcrest Ctr., Inc. v. Rone, 711 So. 2d 901, 906 (Ala. 1997); Ex parte Lumpkin, 702 So. 2d 462, 466–67 (Ala. 1997); Palm Harbor Homes v. Crawford, 689 So. 2d 3, 9 (Ala. 1997); Gewin v. TCF Asset Mgmt. Corp., 668 So. 2d 523, 526 –27 (Ala. 1995); Pinyan v. Cmty. Bank, 644 So. 2d 919, 923 –24 (Ala. 1994); Sooudi v. Century Plaza Co., 622 So. 2d 1275, 1278 (Ala. 1993); Cabinetware, Inc. v. Birmingham Saw Works, Inc., 614 So. 2d 1034, 1037– 38 (Ala. 1993); Udcoff v. Friedman, 614 So. 2d 436, 439 (Ala. 1993); Allstate Ins. Co. v. Hilley, 595 So. 2d 873, 876 (Ala. 1992); Leisure Am. Resorts, Inc. v. Knutilla, 547 So. 2d 424, 426 –27 (Ala. 1989); Padgett v. Hughes, 535 So. 2d 140, 142 (Ala. 1988); Marshall Durbin Farms, Inc. v. Landers, 470 So. 2d 1098, 1101 (Ala. 1985); Popwell v. Greene, 465 So. 2d 384, 387 (Ala. 1985); Clanton v. Bains Oil Co., 417 So. 2d 149, 151 (Ala. 1982); Cap Gemini Am., Inc. v. Judd, 597 N.E.2d

Notes to Pages 48–49

9. 10. 11.

12.

13.

14.

1272, 1279 (Ind. Ct. App. 1992); Cent. Texas Micrographics v. Leal, 908 S.W.2d 292, 299 (Tex. Ct. App. 1995). Of thirty-four randomly selected Alabama decisions that mentioned intent to deceive as a separate element of promissory fraud, thirteen found sufficient evidence of promissory fraud to send the issue to the jury. Of these, only six explicitly found that the claimant provided evidence of intent to deceive, and only two of the six discussed evidence of such intent that was distinct from evidence that the defendant did not intend to perform. Seven of the thirteen decisions found sufficient evidence of promissory fraud without mentioning any evidence of the defendant-promisor’s knowledge that her promise was false. Case names available from authors. 547 So. 2d 424 (Ala. 1989). Id. at 426. Roda v. Berko, 81 N.E.2d 912, 915 (Ill. 1948). See also Weeks v. Samsung Heavy Indus. Co., 126 F.3d 926, 942 (7th Cir. 1997); Bower v. Jones, 978 F.2d 1004, 1012 (7th Cir. 1992); Advent Elecs. v. Buckman, 918 F. Supp. 260, 264 (N.D. Ill. 1996); Commonwealth E. Mortgage Co. v. Williams, 516 N.E.2d 515, 521 (Ill. App. Ct. 1987); Sullivan v. Sullivan, 223 N.E.2d 461, 464 (Ill. App. Ct. 1967). Pennsylvania had at one time a rule similar to the current Illinois stance, at least with respect to the sale of goods: “Where there is a sale of goods and delivery of possession, even though the buyer intends, at the time, not to pay for them, and conceals his insolvency from the vendor, it is not a cheat that will avoid the sale. There must be artifice practised [sic ], such as was intended and fitted to deceive, to constitute a cheat.” Backentoss v. Speicher, 31 Pa. 324, 326 –27 (1858). See generally Robert Wm. Garland, Is Insolvency at Time of Entering into a Contract Fraud in Esse? 11 U. Pitt. L. Rev. 666, 668–70 (1950); Herbert Horn, Misrepresentation of Intention to Pay, 35 Dickinson L. Rev. 27 (1930). Weeks v. Samsung Heavy Indus. Co., 126 F.3d 926, 942 (7th Cir. 1997); Bower v. Jones, 978 F.2d 1004, 1012 (7th Cir. 1992); Advent Elecs. v. Buckman, 918 F. Supp. 260, 264 –65 (N.D. Ill. 1996); Commonwealth E. Mortgage Co. v. Williams, 516 N.E.2d 515, 521 (Ill. App. Ct. 1987); Baker, Bourgeois & Assocs. v. Taylor, 410 N.E.2d 55, 59 (Ill. App. Ct. 1980); Zaborowski v. Hoffman Rosner Corp., 356 N.E.2d 653, 656 (Ill. App. Ct. 1976). Raymond R. Nolasco, Note, Promissory Fraud in Illinois: What Is a Scheme to Defraud? 8 N. Ill. U. L. Rev. 485, 488–89 (1988); Michael J. Polelle, An Illinois Choice: Fossil Law or an Action for Promissory Fraud, 32 DePaul L. Rev. 565, 570–71 (1983). Some courts applying the Illinois law have taken the same line. See, e.g., N. Am. Plywood Corp. v. Osh Kosh Trunk & Luggage Co., 263 F.2d 543, 545 (7th Cir. 1959) (describing the plaintiff’s claims in the “scheme or device” language but stating the general Illinois rule against promissoryfraud claims in tort and not mentioning the scheme exception); Stewart-Warner Corp. v. Remco, Inc., 205 F.2d 583, 587 (7th Cir. 1953) (not mentioning the scheme exception); McAfee v. Rockford Coca-Cola Bottling Co., 352 N.E.2d 50, 52 (Ill. App. Ct. 1976) (same); Alikonis v. Alikonis, 343 N.E.2d 161, 164 (Ill. App. Ct. 1976) (same). See Steinberg v. Chi. Med. Sch., 371 N.E.2d 634, 641 (Ill. 1977); Willis v. Atkins, 106 N.E.2d 370, 378 (Ill. 1952); Sullivan v. Sullivan, 223 N.E.2d 461, 464 (Ill. App. Ct. 1967).

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15. See Desnick v. American Broadcasting Companies, Inc., 44 F.3d 1345, 1354 (7th Cir. 1995) (Posner, J.) (“The distinction between a mere promissory fraud and a scheme of promissory fraud is elusive, and has caused, to say the least, considerable uncertainty, as even the Illinois cases acknowledge.” [citing cases]); Nolasco, supra note 13, at 490 – 99; Polelle, supra note 13, at 578 – 88. 16. We found two cases rejecting promissory fraud claims where the defendant clearly did not intend to perform and in which the court mentioned that there was insufficient evidence of an intent to deceive. But the outcome in each was based on a finding that the defendant did not make any promise at all and thus did not make the alleged misrepresentation. Shirley v. Cmty. Bank, 690 So. 2d 42, 423 –24 (Ala. Civ. App. 1997) (loan officer’s assurances that things looked good did not constitute promise and officer did not have intent to deceive); Bulbman, Inc. v. Nev. Bell, 825 P.2d 588, 592 (Nev. 1992) (telephone salesperson’s assurances about time to install system and functioning were mere puffery and salesperson did not have intent to deceive). That is, in neither case did the finding that there was no intent to deceive make a difference in the outcome. 17. Miller v. Fairchild Indus., Inc., 629 A.2d 1293, 1304 (Md. Ct. Spec. App. 1993); see also Restatement (Second) of Torts § 530(1) cmt. b (1979) (If a speaker does not have the intention he represents himself to have, “he must of course be taken to know that he does not have it.”); Fowler V. Harper et al., The Law of Torts § 7.8, 418 (3d ed. 1996) (“[I]nnocent false statements could scarcely include false statements of one’s own intention, or promissory fraud.”). 18. Semiwarranting representations, which say that the promisor does not believe that it is not in the promisee’s interest to rely, are only about the promisor’s beliefs. Unlike positive and opaque representations, a semiwarranting representation does not entail anything about the objective probability that the promisor will perform. (The promisor might not believe that it is not in the promisee’s interest to rely simply because she has no idea what his participation constraint is.) Because a semiwarranting representation is only about the subjective facts of the promisor’s beliefs, it is impossible for her to be mistaken as to the underlying facts. 19. See, e.g., Wolk v. Churchill, 696 F.2d 621, 626 (8th Cir. 1982) (Under Missouri law, uncertainty as to the likelihood of future performance is not enough to sustain a claim of promissory fraud.); see also 37 Am. Jur. 2d Fraud and Deceit §§ 53 (“Intention Not to Pay as Essence”), 54 (“Effect of Lack of Reasonable Expectation of Ability to Pay”) (2001). But see Sofka v. Thal, 662 S.W.2d 502, 507 (Mo. 1983) (en banc) (A promissory fraud claim should survive a motion for summary judgment when there was evidence “that [the defendant] either had no intention of performing the promise . . . when it was made or made the promise in reckless disregard as to whether he could perform.”). 20. 107 N.W. 454 (Wis. 1906). 21. Id. at 456 (erroneously attributing quotation to Nichols v. Pinner, 18 N.Y. 295 [1858], and actually quoting almost verbatim Morrison v. Shuster, 1 Mackey 190, 203 [1881]). 22. Interestingly enough, the error of this approach was diagnosed by one of the lesserquoted opinions in Edgington v. Fitzmaurice. In examining the allegedly fraudulent statements of the bond issuers in that case, Lord Denman opined:

Notes to Pages 52–55

When you tell me that the objects of this issue are to enable you to complete present alterations, to purchase horses and vans, and to further develope [sic ] the supply of cheap fish from the coast, that is telling me in so many words, not only that such objects are in your mind, but that if I give you so much money towards that, or if 100 other subscribers give you the whole or part of the £25,000, you are able with reasonable certainty to employ any money subscribed on the faith of your words in doing the things which you tell me it is your object by the issue to obtain . . . I think that this statement [of intention], if not substantially false, is, looking at the whole of the case, a most reckless statement which, if really entertained, was under the circumstances, as against people who are asked to advance their money, of the most gambling and speculative character, and on that ground also the Plaintiff is entitled to recover. 29 Ch. D. 459, 475 (Ch. App. 1885). 23. Yale University could have been charged with promissory fraud on similar grounds when, in 1984, it accepted students’ tuition payments even though it knew that a strike by clerical and technical workers was quite likely. Though the university might have intended to perform its promise to provide students a full educational experience, the objective probability that it would be able to do so was considerably less than the students could reasonably assume, given such an intention. But the students who sued the university, who included one of the authors, claimed only breach of contract. See Walkout at Yale Draws Lawsuit by 102 Students, N.Y. Times, Oct. 26, 1984, at B2. 24. Cheney v. U.S. Dist. Court for Dist. of Columbia, 124 S.Ct. 1391, 1397 (2004) (memorandum of Justice Scalia). 25. See Ian Ayres & Barry Nalebuff, The Wrong Ticket to Ride, N.Y. Times, March 24, 2004, at A29. Even if there wasn’t an express provision, there might be an implicit representation of an intent to use tickets that you buy. 26. Without more facts, the case presents a close question as to whether the misrepresentation was reckless. 27. The Second Restatement of Torts reflects the distinction, though it is hardly transparent on this point. Section 526 purportedly defines the scienter requirement but concerns only the speaker’s knowledge or reckless disregard of the underlying facts. Restatement (Second) of Torts § 526 (1979). Section 528 discusses mistake as to the meaning of the speech act and states that a negligent mistake is not fraudulent. Id. § 528. 28. 833 F. Supp. 1405, 1422 (D. Minn. 1993); see also Price v. Highland Community Bank, 722 F. Supp. 454, 459 – 460 (N.D. Ill. 1989); US Diagnostic, Inc. v. Shelby Radiology, P.C., 793 So. 2d 714, 720 (Ala. 2000); Sealing Equip. Prods. Co. v. Velarde, 644 So. 2d 904, 909 (Ala. 1994); Gen. Motors Acceptance Corp. v. Covington, 586 So. 2d 178, 183 (Ala. 1991); Kent v. White, 520 S.E.2d 481, 484 (Ga. Ct. App. 1999). 29. 833 F. Supp. at 1423. 30. Id. 31. One of the few cases to recognize the possibility of reckless promissory misrepresentation is Beneficial Personnel Services, Inc. v. Rey, 927 S.W.2d 157 (Tex. App. 1996), in which a Texas Court of Appeals was asked to reverse a jury finding of promissory fraud. See also Beneficial Personnel Servs., Inc. v. Porras, 927 S.W.2d 177 (Tex. Ct. App. 1996). Benefi-

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cial, an employment service, had approached an oil company and offered to hire all of its employees and lease their services back to the company. It promised the employees that they would be provided the same benefits they had previously received under workman’s compensation, though in fact Beneficial’s insurance provided fewer benefits. Rey was injured on the job, did not receive his expected benefits, and sued for promissory fraud. The appellate court upheld the finding of promissory fraud, based on its holding that “[a] jury could reasonably conclude that [the defendant] had no idea what the Texas Workers’ Compensation Act required, and therefore acted recklessly in promising to provide those benefits.” 927 S.W.2d at 170. Atiyah describes an example of such recklessness in which the defendant didn’t read the terms of the contract, which resulted “in the opposite party being misled as to [her] intentions.” P. S. Atiyah, The Rise and Fall of Freedom of Contract 733 (1979) (discussing United Dominions Trust Ltd. v. Western [1975] 3 All E.R. 1017). Atiyah takes this as evidence that contract is becoming more like tort, while we would say that it’s really just an example of the tort of misrepresentation accompanying a contract. Sebert also makes the point that “[r]eckless disregard . . . should also suffice for promissory fraud,” though he doesn’t explore further what this entails. John A. Sebert Jr., Punitive and Nonpecuniary Damages in Actions Based upon Contract: Toward Achieving the Objective of Full Compensation, 33 U.C.L.A. L. Rev. 1565, 1613 (1986). CHAPTER 4: WHY PROMISSORY FRAUD?

1. So far as we can tell, only Indiana still adheres to the old rule that a promise cannot be the basis for an action in fraud. See Balue v. Taylor, 36 N.E. 269, 271 (Ind. 1894); Epperly v. Johnson, 734 N.E.2d 1066, 1073 (Ind. Ct. App. 2000); but see Lynn C. Tyler, Promissory Misrepresentations: Are They, and Should They Be, Actionable as Constructive Fraud? 39OCT Res Gestae 17 (1995) (describing conflicting statements from Indiana’s Supreme Court on the issue). Indiana, however, allows for an exception: a promissory-fraud-like action is permitted when an insolvent buyer represents, actually or implicitly, that he or she intends to pay for goods, when in fact he or she has neither the ability nor the intention to pay for them. 6 Ind. Law Encycl., Contracts § 36 (2003). While we believe that the remaining states have adopted the majority rule we must add the caveat that the law of misrepresented intent is not always so clear. High-court opinions are often equivocal, and lower courts conflict. See, e.g., Joe Manuel & Stuart James, Tennessee’s Theories of Misrepresentation, 22 Memp. St. U. L. Rev. 633, 646 – 49 (1992) (discussing conflicting contemporaneous statements by Tennessee courts). 2. See, e.g., A. Landreth Co. v. Schevenel, 52 S.W. 148, 148 (Tenn. 1899) (“As distinguished from the false representation of a fact, the false representation as to a matter of intention not amounting to a matter of fact, though it may have influenced a transaction, is not a fraud at law, nor does it afford a ground of relief in equity.” [quoting William Williamson Kerr, A Treatise on the Law of Fraud and Mistake 88 (1868)]). The metaphysical argument hasn’t entirely disappeared. See Joe Manuel & Stuart James, Tennessee’s Theories of Misrepresentation, 22 Memp. St. U.L. Rev. 633, 646, 651 (1992). 3. Many of these are discussed by Justin Sweet, Promissory Fraud and the Parol Evidence

Notes to Pages 59–63

4.

5.

6.

7. 8. 9. 10.

11. 12.

13. 14. 15.

Rule, 49 Cal. L. Rev. 877, 894 –96 (1961). They are also thoughtfully presented in Kevin E. Davis, Promissory Fraud: A Cost-Benefit Analysis, 2004 Wisc. L. Rev. (forthcoming). See, e.g., Miller v. Sutliff, 89 N.E. 651, 652 (Ill. 1909) (“If an intention not to perform constituted fraud, every transaction might be avoided where the facts justified an inference that a party did not intend to pay the consideration or keep his agreement. A mere breach of contract does not amount to fraud, and neither a knowledge of inability to perform, nor an intention not to do so, would make the transaction fraudulent.”). One sees this argument often in criticisms of the crime of false promise. See infra chapter 7, pp. 177 – 78. See also Singhal & Subrahmanyan’s Indian Contract Act, vol. 1, 437 (Justice K. Shanmukham ed., 4th ed. 1999) (“Clause (3) [of the Indian Contract Act, which provides for promissory fraud liability] introduces a very uncertain and dangerous element under the doctrine of fraud, because it is practically impossible to decide, whether, at the time of making the promise, the person making it intended to keep it or not.”). See Stahl v. Balsara, 587 P.2d 1210, 1214 (Haw. 1978) (stating that the representation of an intention is a “mere prognostication or prophesy as to happening of future events,” and that it is “utterly unreasonable for plaintiff to rely upon such representations”); McAllister v. Indianapolis & Cincinnati R.R., 15 Ind. 11, 14 (1860) (stating that defendant’s promise does not “amount to more than the expression of an existing intention . . . and could not have been understood to amount to more”). This is how Sweet reads Wigmore’s objection to the action for promissory fraud. Sweet, supra note 3, at 896 (discussing 9 Wigmore, Evidence § 2439 [3d ed. 1940]). See id. at 895. Speakers of Sport, Inc. v. ProServ, 178 F.3d 862, 866 (1999). See Jean Hampton, A New Theory of Retribution, in Liability and Responsibility: Essays in Law and Morals 377 (R.G. Frey & Christopher W. Morris eds., 1991); Jean Hampton, Correcting Harms Versus Righting Wrongs: The Goal of Retribution, 39 U.C.L.A. L. Rev. 1659 (1992); Weymouth G. Lowe, Case Note, Promises Relating to Future Conduct as Misrepresentations of Fact in the Law of Fraud, 15 J. of the Bar Assoc. of Kan. 305, 305 (1947) (“To most, there is a natural repugnancy in allowing unscrupulous persons to wag a free and unbridled tongue resulting in injury to others.”). See Jules Coleman, Risks and Wrongs (1992), especially chapters 16 –18. This is an empirical generalization, not a necessary truth about promising. One can imagine cases in which the primary purpose of a promisor is not to induce reliance. For instance, a smoker might promise her father that she will quit smoking because she believes that being bound by the moral commitment of a promise will help her succeed in quitting. The reason for her promise is to bind herself to the mast, not to induce reliance. But the point of the vast majority of promises is to induce reliance of one sort or another in the promisee. Often, but not always. See the discussion of perfect expectation damages and specific performance below. Dori Kimel makes much of this in his account of extralegal promises. See From Promise to Contract: Towards a Liberal Theory of Contract 8 –22, 57–65 (2003). For discussions of these and other sorts of constraints on self-interested behavior that we use in predicting the behavior of others, see Carol M. Rose, Trust in the Mirror of Betrayal,

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75 B.U. L. Rev. 531, 535 –41 (1995); Robert C. Ellickson, A Critique of Economic and Sociological Theories of Social Control, 16 J. Legal Stud. 67, 71–72 (1987). 16. If one treats Henry’s opportunity costs in not contracting with Anais as a part of the reliance costs of contracting with June, one can make the difference between the reliability problem and the price-selection decision disappear. But this would be to gloss over real differences between the two that will become apparent as our analysis proceeds. In particular, while the reliability problem can be solved by full reliance damages, the priceselection decision can only be addressed, if at all, through expectation damages. 17. See generally Robert Cooter, Unity in Tort, Contract and Property: The Model of Precaution, 73 Cal. L. Rev. 1 (1985). 18. This can be done by making damages invariant (which the parties can do by using a liquidated damages clause or the courts can do by enforcing specific performance or a fixed monetary award), by limiting actual reliance damages to those reasonably incurred (imposing mitigation and other reasonableness requirements), or by making damages subcompensatory (for example, paying fifty cents on the dollar). Which approach one chooses will depend on how one weighs the variety of other factors that damage measures impact—the breach decision, the selection decision, and so on. 19. Richard Craswell is one of the few theorists to recognize the impact of informational asymmetries as to the probability of performance on optimal reliance. Richard Craswell, Performance, Reliance, and One-Sided Information, 18 J. Legal Stud. 365 (1989). 20. This assumes that Martha’s competitor doesn’t charge a higher price and is certain to perform. Relaxing these assumptions would increase the minimum probability of nonperformance at which hedging would be in George’s interest (George stands to gain less from hedging) but would not change the conclusion of our argument. 21. Our argument here has focused only on investments that benefit only the party making the investment. There are also cases of what Che and Hausch call “cooperative investments,” that is, investments that generate a direct benefit for the investor’s trading partner. Yeon-Koo Che & Donald B. Hausch, Cooperative Investments and the Value of Contracting, 89 Am. Econ. Rev. 125 (1999). In such situations, the fact that the promisor expects to benefit from the promisee’s investment can complicate her incentives to share information about the probability of performance—either giving her all the more reason to overstate it (for example, when the promisee is more likely to make the investment if he thinks she will perform) or giving her a new reason not to overstate it (for example, when the investment is a precaution that also benefits the promisor). 22. This is not to say that these are the only benefits of credible promissory representations. Craswell shows, for instance, that in at least some contexts, the more a promisor can share her information about the probability of performance with the promisee, the more likely it is that the promisor will have the right incentives to invest optimally in gathering information on that subject. Richard Craswell, Precontractual Investigation as an Optimal Precaution Problem, 17 J. Legal Stud. 401, 416 –20 (1988). 23. Farrell and Rabin give a general account of how shifting the incentives to tell the truth can secure effective communication. Joseph Farrell & Matthew Rabin, Cheap Talk, 10 J. of Econ. Persp. 103 (1996). In their idiom, legal liability for promissory misrepresenta-

Notes to Pages 65–70

tions attempts to make promissory representations “self-committing”—that is, “if believed, it creates incentives for the speaker to fulfill it.” Id. at 111. 24. Richard Craswell, Contract Remedies, Renegotiation, and the Theory of Efficient Breach, 61 S. Cal. L. Rev. 629 (1988); see also Robert Cooter & Melvin Aron Eisenberg, Damages for Breach of Contract, 73 Calif. L. Rev. 1432 (1985). 25. The objection that promissory fraud liability might be superfluous in the face of full compensation was first pressed on us by Alan Schwartz during a summer workshop sponsored by the Olin Program for Law and Economics at Yale Law School. It is systematically explored in Davis, supra n. 3. 26. In this respect, expectation damages are comparable to warranties. Grossman points out that where it is difficult for a seller to convey information about the quality of its product, a warranty can provide the necessary assurances. “[W]hen the consumer is offered contracts involving a complete warranty . . . then he does not care about quality.” Sanford J. Grossman, The Informational Role of Warranties and Private Disclosure about Product Quality, 24 J.L. & Econ. 461, 474 (1981). In a perfectly working system of expectation damages, a promisor can give the promisee something like a warranty for performance by giving her the ability to bring an action for breach. 27. The argument that specific performance can better ensure full compensation than monetary damages has been made most influentially by Alan Schwartz. See Alan Schwartz, The Case for Specific Performance, 89 Yale L. J. 271, 274 (1979) (“Specific performance is the most accurate method of achieving the compensation goal of contract remedies because it gives the promisee the precise performance that he purchased.”). 28. This is not to say that the promisee won’t care what the probability of performance is. If reliance damages are less than expectation damages, then the promisee will still prefer performance to nonperformance. The point is only that it won’t matter to his binary decision whether or not to enter into the transaction. 29. The proposal can be found at Craswell, supra note 24, at 650 – 53. 30. Whether specific performance provides a parallel solution to the price-selection problem is a question that Craswell doesn’t address and we won’t attempt to answer here. We note, however, that it is crucial to Craswell’s model that the anticipated costs to the promisor of paying damages are equal to the anticipated costs to the promisee of the promisor’s breach. It is far from obvious that this will be the case where the remedy is specific performance. 31. Craswell, supra note 19. 32. Id. at 367. 33. Id. at 383. 34. Id. at 380. 35. “S’s incentive to overstate the likelihood of performance (in order to charge B a higher price) will be tempered by the realization that doing so will also increase her liability if she fails to perform. . . . [T]hese two incentives will exactly balance, so that S’s incentives under the perceived optimal expectation measure will be to tell B nothing but the truth.” Id. at 383. Craswell makes this argument in part B of his Mathematical Appendix. Id. at 400– 01.

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Notes to Pages 71–72

36. We are not, of course, the first to identify the manifold causes of subcompensation. See, e.g., John A. Sebert Jr., Punitive and Nonpecuniary Damages in Actions Based upon Contract: Toward Achieving the Objective of Full Compensation, 33 U.C.L.A. L. Rev. 1565, 1571– 84 (1986). 37. See Robert Cooter, Punitive Damages for Deterrence: When and How Much? 40 Ala. L. Rev. 1143 (1989); A. Mitchell Polinsky & Steven Shavell, Punitive Damages: An Economic Analysis, 111 Harv. L. Rev. 869 (1998). For a description of some complications in establishing the proper multiplier and alternatives to the multiplier principle, see Richard Craswell, Deterrence and Damages: The Multiplier Principle and Its Alternatives, 97 Mich. L. Rev. 2185 (1999). 38. See, e.g., Restatement (Second) of Contracts § 355 (1981) (“Punitive damages are not recoverable for a breach of contract unless the conduct constituting the breach is also a tort for which punitive damages are recoverable.”). William Dodge, The Case for Punitive Damages in Contracts, 48 Duke L.J. 629, 636–51 (1999), provides a survey of recent trends. He concludes that “while a significant minority of states do permit punitive damages for some breaches of contract, most states do not” and that “the current trend is in the direction of contracting rather than expanding the availability of punitive damages.” Id. at 651. 39. Of course punitive promissory-fraud damages might also act as a lure for frivolous suits. But, as we argue below, by allowing promisors to limit their liability with appropriate disclaimers (for example, by making an opaque promise) and by requiring additional evidence of wrongdoing, punitive damages for insincere promising can be made less likely to promote opportunistic behavior by promisees. 40. The Supreme Court has summarized the arguments for the rule as follows: “[S]ince litigation is at best uncertain one should not be penalized for merely defending or prosecuting a lawsuit, and . . . the poor might be unjustly discouraged from instituting actions to vindicate their rights if the penalty for losing included the fees of their opponents’ counsel. Also, the time, expense, and difficulties of proof inherent in litigating the question of what constitutes reasonable attorney’s fees would pose substantial burdens for judicial administration.” Fleischmann Distilling Corp. v. Maier Brewing Co., 386 U.S. 714, 718 (1967) (citations omitted). For an overview of the history of and contemporary arguments surrounding the American Rule, see John Vargo, The American Rule on Attorney Fee Allocation: The Injured Person’s Access to Justice, 42 Am. U. L. Rev. 1567 (1993). 41. See generally Restatement (Second) of Contracts § 353 (1981); 5 Arthur Linton Corbin, Corbin on Contracts § 1076 (1964); 3 E. Allan Farnsworth, Farnsworth on Contracts § 12.17, at 288–90 (2d ed. 1998). For a clear introduction to the law on nonpecuniary damages, see Douglas J. Whaley, Paying for the Agony: The Recovery of Emotional Distress Damages in Contract Actions, 26 Suffolk U. L. Rev. 935 (1992). For arguments on the other side, see Bruce Chapman & Michael Trebilcock, Punitive Damages: Divergence in Search of a Rationale, 40 Ala. L. Rev. 741, 770–74 (1989) (arguing that from a Rawlsian original-position perspective, we would want compensation for nonpecuniary damages). 42. Restatement (Second) Contracts § 352 cmt. a (1981). 43. Hadley v. Baxendale, 9 Ex. 341, 156 Eng. Rep. 145 (1854); Restatement (Second) of Con-

Notes to Pages 72–75

tracts § 351 (1981). See generally Ian Ayres & Robert Gertner, Filling Gaps in Incomplete Contracts: An Economic Theory of Default Rules, 99 Yale L.J. 87, 101–04 (1989). 44. See supra note 18. Note that this includes the requirement to mitigate damages. Restatement (Second) of Contracts § 350 (1981). 45. Not to mention the instances when insisting on subcompensatory damages are part of a promisor’s scheme to defraud. See, e.g., Fidelity-Philadelphia Trust Co. v. Simpson, 143 A. 202 (Penn. 1928). 46. In addition to the possible efficiency gains from subcompensation we’ve already mentioned, it has also been argued that reliance rather than expectation does a better job at promoting cooperative investments—for example, a promisor’s investments that will increase the promisee’s profits. Yeon-Koo Che & Tai-Yeong Chung, Contract Damages and Cooperative Investments, 30 Rand J. of Econ. 84 (1999). 47. Guido Calabresi & A. Douglas Melamed, Property Rules, Liability Rules, and Inalienability: One View of the Cathedral, 85 Harv. L. Rev. 1089 (1972). Property rules attempt to set the cost of infringement so high that no one will find infringement in her interest. Liability rules, on the other hand, set an objectively determined price for violations that is not meant to deter all nonconsensual infringements. See Ian Ayres, Optional Law: Real Options in the Structure of Legal Entitlements (forthcoming 2005). 48. Robert Cooter, Prices and Sanctions, 84 Colum. L. Rev. 1523, 1523 (1984). 49. Craswell’s approach to contract-formation issues can be found in Richard Craswell, Property Rules and Liability Rules in Unconscionability and Related Doctrines, 60 U. Chi. L. Rev. 1 (1993). While we follow Craswell in thinking of the relevant question as incentivizing consent, we have a different understanding of what counts as a property rule and a liability rule in contract-formation cases. For Craswell, the paradigm property rule is rescission and the paradigm liability rule is court imposition of reasonable terms. This cannot be the right analysis for cases of actionable promissory misrepresentations, which presuppose that the promisor has breached the contract. In such cases, rescission would have no deterrence value, since the transaction has already been terminated. Furthermore, since the misrepresentation concerns a fact, not a term of the contract, it makes no sense to think of the court imposing a reasonable substitute as a liability-rule solution. Because much of Craswell’s actual analysis of how the law should treat formation problems rests on his understanding of the relevant property and liability rules, his conclusions are of limited applicability to the problem of promissory misrepresentations. 50. Cf. Craswsell, supra note 49, at 30 (“As [a liar] can remove this impediment simply by not lying, lies—like the classic gun-to-the-head-duress—are good candidates for the application of a property rule.”), 52– 53 (discussing fraud). 51. Restatement (Third) of Torts: Liab. for Physical Harm § 2 (Tentative Draft No. 1, 2001). We recognize that by simply relying on the draft Third Restatement’s definition we are glossing over a very complex topic. A complete account the concept of recklessness, however, would not add much to our understanding of how the law should respond to promissory misrepresentations. For an excellent overview of the history and different meanings of “recklessness” in the common law’s approach to fraud, see William H. Kuehnle, On Scienter, Knowledge, and Recklessness under the Federal Securities Law, 34 Hous. L. Rev. 121, 151–75 (1997).

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52. United States v. Carroll Towing Co., 159 F.2d 169, 173 (2d Cir. 1947) (“[I]f the probability [of an accident] be called P; the injury, L; and the burden [of adequate precautions], B; liability depends upon whether B is less than L multiplied by P: i.e., whether B  PL.”); Restatement (Third) of Torts: Liab. for Physical Harm § 3 (Tentative Draft No. 1, 2001). See generally Stephen G. Gilles, On Determining Negligence: Hand Formula Balancing, the Reasonable Person Standard, and the Jury, 54 Vand. L. Rev. 813 (2001). 53. Landes and Posner make a similar point in their analysis of recklessness: “In the case of recklessness . . . the gap between the expected accident costs and the costs of avoidance is so great that there is little danger of penalizing socially beneficial conduct or inducing excessive care. In these circumstances punitive damages may be defensible as providing a surer deterrent than compensatory damages to conduct that we know we want to deter.” William M. Landes & Richard A. Posner, The Economic Structure of Tort Law 162 (1987). See also Jason S. Johnston, Punitive Liability: A New Paradigm of Efficiency in Tort Law, 87 Colum. L. Rev. 1385, 1395 – 98 (1987). 54. Cass and Hylton make a similar point with respect to specific intent requirements. Ronald A. Cass & Keith N. Hylton, Antitrust Intent, 74 S. Cal. L. Rev. 657, 692– 97 (2001). 55. See generally Prosser and Keeton on Torts § 105 (5th ed. 1984). 56. TXO Prod. Corp. v. Alliance Resources Corp., 419 S.E.2d 870, 887– 89 (W. Va. 1992), aff’d 509 U.S. 443 (1993). 57. This approach should be distinguished from Sebert’s argument for punitive damages in contract and the reason for his positive attitude toward promissory fraud. Sebert, supra note 36, at 1607–13. While the idea of subcompensation is also central to Sebert’s argument, he seems to mean punitive damages simply to make up for what is otherwise not compensated. We, on the other hand, accept that, in many situations, subcompensation for breach is a fact of life and recommend punitive damages for promissory fraud to improve the functioning of promissory representations, which are a tool that parties use to deal with that fact. Our approach may, however, be consonant with the idea of punitive damages for “fraudulent acts,” which are distinguished from the tort of fraud but are “characterized by dishonesty in fact, unfair dealing, or the lawful appropriation of another’s property by design.” Dodge, supra note 38, at 649 (quoting Perry v. Green, 437 S.E.2d 150, 152 (S.C. Ct. App. 1993)). According to Dodge, South Carolina, Idaho, Mississippi, and New Mexico all allow such damages. The separate incentivization of honesty and fair dealing through property rules may also be a way of dealing with the fact of subcompensation. 58. To avoid pound-of-flesh problems, these clauses would still need to meet unconscionability scrutiny. 59. Such a rule does not threaten chapter 5’s proposed mandatory floor—that every promise says at least that the promisor does not intend not to perform. That representation is false only if the promisor intends not to perform, which means that the promisor is mistaken neither as to the terms of her promise nor as to the underlying facts. That is, violations of our proposed mandatory floor are perforce knowing misrepresentations, that is, instances of promissory fraud.

Notes to Pages 79–84

60. A claimant’s right to rescind upon proof of material promissory misrepresentation resonates with both the doctrine of material misrepresentation and the doctrine of mutual and unilateral mistake. Restatement (Second) of Contracts §§ 164(1) (1981) (“If a party’s manifestation of assent is induced by either a fraudulent or a material misrepresentation by the other party upon which the recipient is justified in relying, the contract is voidable by the recipient.”); id. § 152 (mutual mistake); id. § 153 (unilateral mistake). 61. See Underwood v. Life Ins. Co. of Georgia, 14 F. Supp. 2d 1266, 1273 (N.D. Ala. 1998). 62. Lost profits are recoverable in tort only where they can reasonably be construed as reliance, not expectation, damages. That is, lost profits will be recoverable only where the claimant promisee forwent opportunities to contract with a reliable party. 63. Michael Dorff makes a similar point about the effect of attaching tort damages to contracts. Attaching Tort Claims to Contract Actions: An Economic Analysis of Contort, 28 Seton Hall L. Rev. 390, 406 – 07 (1997). Dorff, however, thinks that promissory fraud does not provide an economic justification for suspending the limits on breach-of-contract damages embodied in the Hadley rule, in limited recovery for emotional distress, and in not having a damage multiplier. Id. at 425 –26. In our view, Dorff ’s argument gets the inquiry backwards. The first question should be whether we should impose legal liability on promissory misrepresentations as such, and if so how. The answer is that we should, and with tortlike damages. Then we should ask whether awarding such damages interferes with the functions of normal contract damages. We argue that it doesn’t. 64. We would allow damages to include a claimant’s lost expectancy interest as well. 65. Craswell, supra note 49, at 7– 8. 66. This might not be the case if courts were to allow rescission for promissory fraud where they deny it for breach—for example, where the breaching party has substantially performed. Suppose a contractor promises to install Reading Pipe with the intention to install some other brand. Suppose further that the contract is executory, that the buyer must pay only upon full performance by the contractor. A promissory-fraud rule that provided the promisee the right to rescind would give the buyer in this case something like property-rule protection. If the contractor’s only deviation from the contract was the brand of pipe, breach-of-contract rules would not give the buyer a right to rescind, for the breach would not be substantial. Thus a right to rescission would make a difference, here giving the buyer the right not to pay for the installation at all. Cf. Jacob & Youngs, Inc. v. Kent, 129 N.E. 889 (N.Y. 1921). 67. See, e.g., Anthony T. Kronman, Specific Performance, 45 U. Chi. L. Rev. 351 (1978). 68. See, e.g., Polinsky & Shavell, supra note 37. 69. For further details on these points, see generally Keith Hylton, Punitive Damages and the Economic Theory of Penalties, 87 Geo. L.J. 421 (1998). CHAPTER 5: THE REPRESENTATION INQUIRY

1. See supra chapter 4 note 1. 2. See, e.g., U.S. Diagnostic, Inc. v. Shelby Radiology, P.C., 793 So. 2d 714 (Ala. 2000) (evidence sufficient for jury to find that defendant made oral agreement to accept terms of written contract); Berkeley Bank for Coops. v. Meibos, 607 P.2d 798 (Utah 1980) (evi-

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Notes to Pages 84–86

3.

4.

5.

6. 7. 8. 9.

10.

dence sufficed to show that defendant made oral promise that notes would not be collected on). See, e.g., Bulbman, Inc. v. Nevada Bell, 825 P.2d 588 (Nev. 1992) (representation that telephone installation would take thirty minutes and that there would be no problems mere puffery); Dowling v. NADW Marketing, Inc., 625 S.W.2d 392 (Tex. App. 1981) (statement in newspaper ad of a “firm buy back agreement” mere dealer’s talk, not a promise). See, e.g., Shirley v. Cmty. Bank, 690 So. 2d 421 (Ala. Civ. App. 1997) (loan officer’s assurances that approval was likely was mere enthusiasm, not promise); Stone v. Enstam, 541 S.W.2d 473 (Tex. Civ. App. 1976) (unduly optimistic predictions cannot be the basis for promissory-fraud action). See, e.g., Capitol Const. Co. v. Alabama Exterior Supply, Inc., 696 So. 2d 1087 (Ala. Civ. App. 1997) (vague or unknown terms indicate that there was no promise); Figueroa v. West, 902 S.W.2d 701 (Tex. App. 1995) (representations in employee handbook so vague as not to constitute promises); Commonwealth E. Mortg. Co. v. Williams, 516 N.E.2d 515 (Ill. App. Ct. 1987) (statement that plaintiff would be able to get second mortgage too indefinite to constitute promise); Clanton v. Bains Oil Co., 417 So. 2d 149 (Ala. 1982) (statement about future sale of business to employee too vague to constitute promise); Chromalloy Am. Corp. v. Universal Hous. Sys. of Am., Inc., 495 F. Supp. 544 (S.D.N.Y. 1980) (clauses in letter disclaiming intent to establish contract rendered plaintiff ’s reliance unreasonable); Guyer v. Cities Serv. Oil Co., 440 F. Supp. 630 (E.D. Wis. 1977) (oral representations so vague and contrary to written contract that plaintiffs had no right to rely on them). But see Beneficial Personnel Servs. of Texas, Inc. v. Rey, 927 S.W.2d 157 (Tex. App. 1996) (employer’s representation to employees that insurance benefits would not change constituted promise); Lane v. Fabert, 533 N.E.2d 546 (Ill. App. 1989) (rejecting defendant pawnbroker’s claim that contract was for sale of item and finding promise to hold item). Howard v. Hammond, 455 S.E.2d 390 (Ga. App. 1995) (local custom of waiting to formalize brokerage agreements until time of sale implied promise to pay commission). See U.C.C. § 2– 609 (1992). See, e.g., AMF, Inc. v. McDonald’s Corp., 536 F.2d 1167 (7th Cir. 1976); F. D. Borkholder Co. v. Sandock, 413 N.E.2d 567 (Ind. 1980). Howard v. Reaume, 16 N.W.2d 686, 688 –89 (Mich. 1944); see also Rankin v. Burnham, 274 P. 98, 98 –99 (Wash. 1929); Commonwealth v. Althause, 93 N.E. 202, 207 (Mass. 1910). This assumption that a promise says nothing about the promisor’s intent might underlie a pre-Edgington Supreme Court case, Sawyer v. Pickett, in which the court distinguished promises from representations of existing fact. 86 U.S. 146, 161– 64. It appears from the Court’s opinion, however, that the claimant did not attempt to argue misrepresented intent. Farris v. Strong, 48 P. 963, 964 (Colo. 1897) (quoting William Williamson Kerr, A Treatise on the Law of Fraud and Mistake 88 [1868]); see also id. (“The representation or concealment must also, in all ordinary cases, have reference to a present or past state of things; for, if a party makes a representation concerning something in the future, it must generally be a statement of intention or opinion, uncertain to the knowledge of both

Notes to Pages 86–94

11. 12.

13.

14.

15.

16.

17. 18.

parties, or it will come to a contract, with the peculiar consequences of a contract.” [quoting Melville M. Bigelow, A Treatise on the Law of Estoppel 481 (1872)]). Edgington v. Fitzmaurice, 29 Ch. D. 459, 483 (Ch. App. 1885). Craswell, however, has had some interesting things to say on how courts should interpret allegedly deceptive advertisements. Richard Craswell, Interpreting Deceptive Advertising, 65 B.U. L. Rev. 657 (1985). Craswell’s basic point is that because an ad’s meaning can be multilayered and will be different for different hearers, courts would do better to take a social-scientific approach. Rather than attempting to interpret the meaning themselves, it would be better to have courts and juries look to empirical evidence of how the ad is understood by the public at large and then to apply the negligence standard to decide whether it is unduly deceptive. Craswell suggests that this follows at least in part from a theory of meaning that takes into account all of the “pragmatic implications of an utterance.” Id. at 716 –719. But his argument is also specific to advertising, where there are multiple hearers, where speakers often communicate in nonliteral ways, and where there is more ambiguity, since hearer and speaker are not face-to-face. See Kent Greenawalt, Law and Objectivity 110 –11 (1992); Michael I. Krauss, Tort Law and Private Ordering, 35 St. Louis U. L.J. 623, 629 – 30 (1991). The reflex of many courts is to consider fidelity and nothing else. See 37 Am. Jur. 2d Fraud and Deceit § 58 (“Construction of Language Used”) (2001) (“In the construction of a representation, the language used is to be interpreted by the effect that it would produce upon an ordinary mind, and words will be given their usual and natural meaning since that is the sense in which the person using them must be presumed to have intended them to be understood; that is, the words of a representation carry with them all usual implications.” [footnotes omitted]). See Ian Ayres & Robert Gertner, Filling Gaps in Incomplete Contracts: An Economic Theory of Default Rules, 99 Yale L.J. 87 (1989); Ian Ayres & Robert Gertner, Majoritarian vs. Minoritarian Defaults, 51 Stan. L. Rev. 1591 (1999). See, e.g., Berkowitz v. Lyons, 119 A. 20, 21–22. (N.J. 1922) (affirming finding of deceit despite the absence of express misrepresentation where fraudulent conduct caused false impression); Pennebaker v. Kimble, 269 P. 981 (Or. 1928); Crompton v. Beedle, 75 A. 331, 335 (Vt. 1910) (holding that a “party to a sale may, without direct misrepresentation, be guilty of fraud by means of words or acts calculated and intended to produce a false impression, and which do in fact deceive and induce the sale”). Of course a semiwarranting promise says more than a nonwarranting promise about the probability of performance, for it at least represents that the promisee does not have a certain belief. Similarly, an opaque promise says more about the promisor’s intentions with respect to performance than a blank promise. Thus when we call semiwarranting and opaque promises “information-poor,” this is meant only relative to fully warranting and positive promises, respectively. Cf. Omri Ben-Shahar & Lisa Bernstein, The Secrecy Interest in Contract Law, 109 Yale L.J. 1885, 1890 –93 (2000). See Parker v. Twentieth Century–Fox Film Corp., 474 P.2d 689 (Cal. 1970); Victor P. Goldberg, Bloomer Girl Revisited or How to Frame an Unmade Picture, 1998 Wis. L. Rev. 1051, 1054 (1998).

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19. Removing the liquidated-damages clause does not change the result. Now, instead of having the option to pay liquidated damages, Leona will have the option to risk courtassessed breach-of-contract damages. In exchange for her option to purchase within two years, Leona has provided Donald with the opportunity to collect damages should she fail to exercise that option. Of course the value of this opportunity will depend both on the anticipated amount of damages and the probability of collecting them. 20. Here we see a limitation of our simplified analysis of the promisee’s cost-benefit calculations in the chapter 2 definition of Pp*. In cases where the promisee expects to be informed of the promisor’s nonperformance before incurring any costs, the probability of his performance is dependent on the probability of her performance. In these cases, the expected cost of the promisee’s performance, which must be discounted by the probability of his performance, is dependent on Pp. We might complicate the definition of Pp* to make this explicit, though doing so wouldn’t change the basic results. 21. We will argue in chapter 7 for an exception to the mandatory floor where the parties have explicitly opted out of legal enforcement of the promise, for example, by using a TINALEA clause (“This is not a legally enforceable agreement”). The more categorical language we use in the meantime should be read with this qualification. 22. There is an even lower probabilistic floor that presents a stronger case for a mandatory rule. Promisors who believe there is zero probability of their performance have certain knowledge that this deal cannot produce gains of trade (above and beyond some nonfraudulent equivalent). But this zero-probability-promise hypothetical is so close to our blank promise that we suggest it is easier to incorporate it within the former mandate. 23. Indeed, even this mandatory floor can be reframed as a default. The promisor in our land-option contract could have entered into an economically equivalent and legally enforceable stand-still agreement. In fact, there is always an enforceable, nonfraudulent agreement that is in substance equivalent to a blank promise. 24. As we discussed above, this 50-percent default represents the probability of the promisor realizing an intention to do the sort of act promised in the mutually known circumstances, taking into account any permissible conditions on her intention to perform. If we were also explicitly to integrate the idea of permissible conditional intentions (which we described in chapter 2, supra pp. 22 – 29), we would recommend a default representation that the promisor intends to perform even if the opportunity costs of her performance increase (she doesn’t have a good-news conditional intention), but not necessarily if performance costs increase in a way that is completely unexpected (she may have a bad-news conditional intention). 25. See Ayres & Gertner, Filling Gaps, supra note 14; Ayres & Gertner, Majoritarian, supra note 14. 26. Thinking about the costs to the promisor of gathering information about the probability of her performance raises a whole host of issues about how best to incentivize potential promisors to engage in such investigation. See Richard Craswell, Precontractual Investigation as an Optimal Precaution Problem, 17 J. Legal Stud. 401 (1988). Even more complex is the question of how disclosure rules—that is, rules that affect the cost of sharing information about the probability of performance—might affect incentives to investigate. See Anthony T. Kronman, Mistake, Disclosure, Information, and the Law of

Notes to Pages 100–109

Contracts, 7 J. Legal Stud. 1, 13 –14 (1978). While a fascinating topic, it is not one we choose to tackle in this book. It’s enough for our purposes to observe that information about the promisor’s subjective states is free to the promisor, while information about the objective probability of performance will always come at some cost. 27. Because the promisor’s information about her own intent costs nothing for her to obtain, we also needn’t worry about disincentivizing the production of socially valuable information with a sticky default that would disclose it more often. See Kronman, supra note 26, at 13 –14. 28. See Ayres & Gertner, Filling Gaps, supra note 14, at 101– 04. 29. See Randy E. Barnett, The Sound of Silence: Default Rules and Contractual Consent, 78 Va. L. Rev. 821, 906 –11 (1992). 30. Supra chapter 2 pp. 42 – 43. Intuitions to the contrary are perhaps driven by the old common-law expectation that parties dealing at arm’s length had no duty to look out for each other’s interest at all. See, e.g., Chase v. Rusk, 90 Mo. App. 25, 27 (Mo. Ct. App. 1901) (“[Parties should] depend upon their own judgment and opinion instead of that of those whose self-interest is against them.”). 31. See Restatement (Second) of Contracts § 205 (1981). 32. Restatement (Second) of Contracts § 161(b) (1981). 33. Of course, the misstatement might have been unknowing. That, however, is the concern of the separate scienter inquiry. 34. Smith v. Harrison, 49 Tenn. 230, 243 (1871). 35. The possibility that an uninformed contractor can create a duty to disclose by asking a question or by herself making a representation is what Ayres and Choi have described as a contractor’s “Laidlaw right.” See Ian Ayres & Stephen Choi, Internalizing Outsider Trading, 101 Mich. L. Rev. 313, 323 & n. 32 (2002). 36. Promisors may use express words of blank promising—for example, “I make no representation about my intent”—but courts should interpret such words as still representing at least no intent not to perform. This parallels the civil-rights interpretation of an employer’s words—“I retain the right to fire you for good, bad, or no reason” to still mean “I promise not to fire you because of racial animus.” 37. Infra chapter 7 pp. 156– 57. 38. See Ben-Shahar & Bernstein, supra note 17, at 1887. 39. Restatement (Second) of Contracts § 206 (1981). 40. Green v. Lumpkin, 702 So. 2d 459, 460 (Ala. Civ. App. 1996). 41. There are a number of promissory fraud cases of this sort. See, e.g., Anderson v. Anderson, 620 S.W.2d 815 (Tex. App. 1981); Pulchny v. Pulchny, 555 S.W.2d 543 (Tex. App. 1977); Pelver v. Pelver, No. 03-98-00224-CV, 1999 Tex. App. LEXIS 4797 (Tex. Ct. App. June 30, 1999); see also Frazier v. Miller, 16 Ill. 48 (1854) (holding that caretaker contract was rescinded based on promissory misrepresentation). In these cases, it might be easier for the claimant to show that the grown child should have known that the possibility of her nonperformance was so great that the parent should not have relied on it than to show that the grown child did not have an initial intent to perform. 42. The existing law of deceit already takes some account of fiduciary, confidential, and special relationships. Most significantly, the doctrine of constructive fraud holds that where

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such a relationship figures into the transaction, a claimant can recover for fraud even without proving intent or recklessness. See generally 37 Am. Jur. 2d Fraud and Deceit § 24 (2001). Presumably this is because a fiduciary-type relationship means that the promisor has a special duty to ensure the veracity of her statement, from which it follows that she should be liable for even her negligent or reasonable misrepresentations. We have no quarrel with this. But while the doctrine of constructive fraud says something important about scienter, it does not capture what can be special about the representational dimension in these situations. It is also commonly held that, while in the normal case an expression of opinion cannot support an action for fraud, it may do so where the hearer “stands in such a relation of trust and confidence to the person whose opinion is asserted that the recipient is reasonable in relying on it.” Restatement (Second) of Contracts § 169(a) (1981). Along similar lines, when many jurisdictions still did not recognize the action for promissory fraud, an exception was made where there was a relationship of trust. See, e.g., Kidd v. Kidd, 49 So. 2d 824, 827 (Miss. 1951) (“We are not unmindful of the general rule that predictions or promises as to future events are not ordinarily sufficient upon which to base actionable fraud, but this general rule has no application where, as here, a relation of trust and confidence exists between the parties, or where, as is deducible from the evidence in this case, the future prediction or promise is part of a general scheme or plan existing at the time to induce a person to act.”); Miller v. Sutliff, 89 N.E. 651, 652– 53 (Ill. 1909). Finally, Dodge reports that “Arizona, Montana, Nevada and Wyoming have held that, even in the absence of an independent tort, punitive damages may be awarded for breach of contract where a ‘special relationship’ exists between the parties.” William S. Dodge, The Case for Punitive Damages in Contracts, 48 Duke L.J. 629, 647 (1999). 43. Douglas Laycock suggests that in some industries local practice is in fact to treat contracts as though they are not binding: “Some agreements that appear to be promises are often treated by trade usage as mere options involving no promise at all. The most obvious and important example is a customer’s offer to buy out of a seller’s inventory. Most consumer customers, and many commercial customers, can cancel orders without fear of liability.” Douglas Laycock, The Death of the Irreparable Injury Rule 256 – 57 (1991). While this may be true as a matter of practice, one wonders whether courts would or should recognize such industry-specific norms. Unlike a custom of treating a contract as nonbinding, legal recognition of which would have the effect of negating all legal obligation, a local norm that promises are opaque leaves in place the contractual obligation but opts out of the central form of liability for insincere promising. 44. The reader who objects that the admitted student has not promised to attend but has instead entered into an option contract, under which she has purchased an option to do so, should recall the above argument that option contracts and opaque contracts are homologous. See supra pp. 93 –94. 45. See Stuart MacCaulay, Non-Contractual Relations in Business: A Preliminary Study, 28 Amer. Soc. Rev. 55 (1963). 46. Penalty clauses, were they enforceable, would have the same sorts of evidentiary values

Notes to Pages 110–14

for the same reasons. See Samuel A. Rea Jr., Efficiency Implications of Penalties and Liquidated Damages, 13 J. Legal Stud. 147, 156 – 57 (1984). This signaling role is comparable to the way a warranty can communicate product quality. As Grossman points out, “In situations in which a seller’s information [about the quality of her product] cannot be conveyed to a buyer, the seller’s warranty can, in effect, transmit that information to the buyer.” Sanford J. Grossman, The Informational Role of Warranties and Private Disclosure about Product Quality, 24 J.L. & Econ. 461, 471 (1981). Just as buyers will assume that the more complete the warranty, the higher the quality, so promisees will assume that the higher the damages offered by the promisor, the greater the likelihood she will perform. 47. See, e.g., Fidelity-Philadelphia Trust Co. v. Simpson, 143 A. 202, 203 (Penn. 1928). 48. Craswell makes a similar point about motive evidence in thinking about ways of proving lack of consent: “[I]f Y claims that X lied to him but X denies having lied, the reasonableness or unreasonableness of the resulting contract might help a court decide which party to believe. If the contract is so onerous that few people would agree to it unless they had been tricked, that makes Y’s story more plausible.” Richard Craswell, Property Rules and Liability Rules in Unconscionability and Related Doctrines, 60 U. Chi. L. Rev. 1, 41– 42 (1993). 49. See supra chapter 2 pp. 29 –36 and chapter 4 pp. 65 – 69. 50. Proof that the promisee required a high-assurance representation is also necessary to show that the representation was material to his decision to enter into the contract or otherwise rely on the promisor’s performance—a separate element of both negligent misrepresentation and fraud. CHAPTER 6: THE VERACITY AND SCIENTER INQUIRIES

1. Hollymatic Corp. v. Holly Sys., Inc., 620 F. Supp. 1366, 1369 (N.D. Ill. 1985); see also Bower v. Jones, 978 F.2d 1004, 1012 (7th Cir. 1992); Advent Elecs. v. Buckman, 918 F. Supp. 260, 264 – 65 (N.D. Ill. 1996); Raymond R. Nolasco, Note, Promissory Fraud in Illinois: What Is a Scheme to Defraud? 8 N. Ill. U.L. Rev. 485, 502– 03 (1988) (suggesting fixing the scheme-or-device exception so that “[a] mere promise should no longer be the equivalent of a ‘scheme’ to defraud which circumvents the general rule which denies recovery for promissory fraud”). 2. Jim-Bob, Inc. v. Mehling, 443 N.W.2d 451, 460 (Mich. Ct. App. 1989) (citing Hi-Way Motor Co. v. Int’l Harvester Co., 247 N.W.2d 813, 816 –17 (Mich. 1976)). 3. Sanders v. First Nat’l Bank, 114 B.R. 507, 516 (M.D. Tenn. 1990) (quoting Farmers & Merchs. Bank v. Petty, 664 S.W.2d 77, 82 [Tenn. Ct. App. 1983] [Conner, J., concurring]). 4. As far as constitutional constraints go, the Supreme Court has held that due process is not violated even when the burden of proof is shifted to the breaching party to show an initial intent to perform. James-Dickinson Farm Mortgage Co. v. Harry, 273 U.S. 119, 124 (1927) (Brandeis, J.) (“It is well settled that a State may consider proof of one fact presumptive evidence of another, if there is a rational connection between them, and also

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5.

6.

7.

8. 9.

10. 11.

that it may change the burden of proof.” [citations omitted]). See also Clarence C. Kunc, Note, Fraud—Misrepresentations of Intent, 19 Neb. L. Bull. 39, 44 (1940) (recommending that once the promisor has failed to perform, “he should bear the burden of showing that he has acted in good faith”). We would reject such burden shifting, for the policy reasons discussed in the text. Fed. R. Civ. P. 9(b) (“In all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity. Malice, intent, knowledge, and other condition of mind of a person may be averred generally.”). Most states have long had a similar pleading requirement for claims of fraud. Thomas M. Cooley, A Treatise on the Law of Torts § 255 (John Lewis ed., Students’ ed. 1907); Howard Oleck, Oleck’s Tort Law Practice Manual § 211 (1982). 15 U.S.C. § 78u-4(b)(2) (2000). Cf. Wharf (Holdings) Ltd. v. United Int’l Holdings, Inc., 532 U.S. 588, 596 (2001) (suggesting that the PSLRA’s pleading requirements can protect against the possibility that allegations of promissory fraud under section 10(b) “will permit numerous plaintiffs to bring federal securities claims that are in reality no more than ordinary state breach-of-contract claims”). N.Y. Penal Law § 155.05(2)(d) (Consol. 2001); see also State v. Basham, 571 S.W.2d 130, 133 (Mo. Ct. App. 1978) (reversing conviction for perpetrating a confidence game based on false promise because of the existence of an alternative explanation for defendant’s failure to perform). People v. Churchill, 390 N.E.2d 1146, 1150 (N.Y. 1979). A few others have gone before into this wilderness. Sebert briefly discusses the evidence that can go into proving promissory fraud and mentions a number of categories in our typology, including the promisor’s knowledge that she would be unable to perform, other acts by the promisor inconsistent with an expectation of performance, a short time between promise and breach, and a pattern of similar breaches. John A. Sebert Jr., Punitive and Nonpecuniary Damages in Actions Based upon Contract: Toward Achieving the Objective of Full Compensation, 33 U.C.L.A. L. Rev. 1565, 1611–13 (1986). See also Nolasco, supra note 1, at 493 –96 (discussing Illinois courts’ findings of a scheme or device to defraud based on [1] a series of misrepresentations by the defendant to the plaintiff; [2] where the fraudulent scheme developed over a long period of time; and [3] where other conduct, besides the false promise of future conduct itself supplied a basis for the perpetration of the fraud”); W. Page Keeton et al., Prosser and Keeton on the Law of Torts § 109, at 765 (5th ed. 1984) (stating evidence for promissory fraud can be based on circumstantial evidence, “such as the defendant’s insolvency or other reason to know that he cannot pay, or his repudiation of the promise soon after it is made, with no intervening change in the situation, or his failure even to attempt any performance, or his continued assurances after it is clear that he will not do so”); Note, The Case for a Law of Promissory Fraud, 53 Colum. L. Rev. 407, 413 –15 (1953). Black’s Law Dictionary 576 (7th ed. 1999). This is expressed in the old rule that “[w]here knowledge is material, a person may testify directly as to whether or not he had knowledge; but not (unless an expert) as to whether another person had knowledge.” Austin Abbott, A Brief on the Modes of Proving the Facts

Notes to Pages 116–17

12.

13. 14. 15.

16. 17.

Most Frequently in Issue § 495 (1889). Or similarly, “[a] witness may not testify as to the motive or intent of another person; but that is to be shown by circumstances, and the declarations of such other person or by his own testimony.” Id. § 481. The idea can be found today in Rule 803(3) of the Federal Rules of Evidence, which excepts from the hearsay rule statements of declarant’s “[t]hen existing mental, emotional, or physical condition.” As noted above, such an out-of-court statement, even if hearsay, would be admissible under the Federal Rules of Evidence, since it concerns the declarant’s then existing mental state. Fed. R. Evid. § 803(3). Since such a statement would be an admission by a party opponent, it would also be excluded from the federal definition of “hearsay.” Id. § 801(d)(2). 29 Ch. D. 459, 463, 468 (Ch. App. 1885). 532 U.S. 588, 591 (2001). Beneficial Personnel Servs., Inc. v. Rey, 927 S.W.2d 157, 170 (Tex. App. 1996), vacated by request of both parties and without reference to the merits in Beneficial Personnel Servs., Inc v. Rey, 938 S.W.2d 717 (Tex. 1997); see also Beneficial Personnel Servs., Inc. v. Porras, 927 S.W.2d 177 (Tex. Ct. App. 1996), vacated by request of both parties and without reference to the merits in Beneficial Personnel Servs., Inc. v. Porras, 938 S.W.2d 716 (Tex. 1997) (parallel facts and claims). In fact, the Texas Court of Appeal’s discussion in Beneficial Personnel Services, Inc. v. Rey confuses intent not to perform with intent to deceive: “The defendant must intend its false representation to induce action. . . . Although failure to perform, standing alone, is not sufficient to establish intent not to perform when the promise was made, it is evidence that may be considered with other facts to establish intent. Slight circumstantial evidence of fraud, when considered with the breach of promise to perform, is sufficient to support a finding of fraudulent intent.” 927 S.W.2d at 170 (citations omitted). Despite the court’s confusion, the evidence of contrary terms in the employment manual was relevant only to the defendant’s intent not to perform, not to its intent to deceive. In fact, the court itself recognized that this might be a case of reckless misrepresentation. Id. In Brungard v. Caprice Records, Inc., 608 S.W.2d 585 (Tenn. Ct. App. 1980), a vanity record label made a variety of promises to an uneducated customer that were contradicted by the terms of the written contract. While the court doesn’t mention the terms of the contract as evidence of the defendant’s intent not to perform the oral promises, it might have. (We discuss why an action for promissory fraud should not be barred by the parol evidence rule in chapter 7.) See also Marshall Durbin Farms, Inc. v. Landers, 470 So. 2d 1098, 1101 (Ala. 1985) (where a witnesses testified that the defendant, a poultry purchaser and supplier of equipment to chicken farmers, had told them of plans to withdraw from the region where the claimant was located prior to the time that the defendant and claimant entered into a sales/purchase agreement). 143 A. 202, 204 (Penn. 1928). 528 N.E.2d 370, 373 (Ill. App. Ct. 1988) (“[R]espondent’s allegations concerning petitioner’s lack of efforts to abide by his promise and his subsequent statements that he had no intention of complying and was referring business elsewhere were sufficient to create

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a prima facie case.”). See also Anderson v. Anderson, 620 S.W.2d 815, 817 (Tex. App. 1981) (describing defendant’s testimony that she did not intend to perform promise of taking care of elderly grandmother when deed was made over to her). 18. See supra chapter 3 pp. 52 – 56; infra chapter 7 pp. 151 – 53. 19. But it does not necessarily show this. For instance, in Cabnetware, Inc. v. Birmingham Saw Works, Inc., 614 So. 2d 1034 (Ala. 1993), the claimant attempted to use the defendant’s testimony that he understood the terms of a sales contract differently to show that he never intended to perform. The case concerned a contract under which the claimant was to sell the defendant’s software, which the defendant cancelled despite the claimant always having met its sales quota. A jury found breach of contract and promissory fraud, the latter based solely on the defendant’s testimony that he had understood the contract to be terminable at any time. The appellate court reversed, reasoning that the mere fact that the defendant understood the contract to be terminable did not indicate that he did not intend to perform his duties under the objective meaning of the contract. Id. at 1037– 38. 20. Thus in Bauer v. Adams, 550 S.W.2d 850 (Mo. Ct. App. 1977), the court rejected a claimant’s attempt to use the testimony from the defendant that he did not intend to provide employees certain benefits. “Standing alone, the deposition testimony is ambiguous. It would support either the inference of defendant’s promise being conditional or the inference that defendant had a present intent not to perform the promise of guaranteed payment which the plaintiffs claim he made.” Id. at 853. 21. A relatively famous example of a defendant who testified to what might be considered a reckless interpretation is Carlill v. Carbolic Smoke Ball Co., 1 Q.B. 256 (Eng. C.A. 1893). See infra chapter 7 pp. 151 – 53. 22. That said, there are differences in the level of certainty associated with the circumstantial evidence of each. In chapter 8, infra pp. 180 –82, we argue that proof of an intent not to perform is likely to be more certain than proof of no intent to perform. 23. A civil action for promissory fraud typically lies only where the promisor has failed to perform. This follows from the requirement of the generic action for deceit that the alleged misrepresentation proximately cause the plaintiff some harm. Representations about the promisor’s intentions (and other representations about the probability of her performance) are in most cases material just because the promisee can use them to predict whether or not she will perform. If the promisor performs or has not yet breached, any damages the claimant suffers are not the proximate result of the promisor’s misrepresentation and there is no action for promissory fraud. See Underwood v. Life Ins. Co. of Georgia, 14 F. Supp. 2d 1266, 1273 (N.D. Ala. 1998). Breach may not be necessary in criminal prosecution of false promise, where there is no proximate cause requirement. See United States v. Mucci, 630 F.2d 737, 741 (10th Cir. 1980) (finding the fact that the defendant had not yet breached of no avail to the defendant “in the face of evidence that the contract was fraudulent from the beginning, there being no intent to perform and no intent to return the money, and that this was known to [the defendant]”). 24. The section of the Model Penal Code that criminalizes false promise makes this explicit: “[D]eception as to a person’s intention to perform a promise shall not be inferred from the fact alone that he did not subsequently perform the promise.” Model Penal Code §

Notes to Page 120

223.3 (1980). See also Dickinson v. Auto Ctr. Mfg. Co., 594 F.2d 523, 527 (5th Cir. 1979); Keith v. Witt Auto Sales, Inc., 578 So. 2d 1269, 1273 (Ala. 1991); Holland v. Lentz, 397 P.2d 787, 795 (Or. 1964). But see Ex parte Grand Manor, Inc., 778 So. 2d 173 (Ala. 2000) (finding a mobile-home manufacturer’s failure to make promised repairs sufficient evidence for a jury’s finding of promissory fraud). 25. This is not always recognized. Thus in Billy Baker Mobile Homes, Inc. v. Foster, 390 S.W.2d 385 (Tex. Ct. App. 1965), the Texas court held that “[t]he failure to perform is not itself evidence of intent not to perform.” Id. at 387. See also Note, The Case for a Law, supra note 9, at 412. 26. Pulchny v. Pulchny, 555 S.W.2d 543, 545 (Tex. Civ. App. 1977) (citations omitted); see also In re Cornner, 191 B.R. 214, 226 (Bankr. N.D. Ala. 1995); Baker v. State, 588 So. 2d 945, 947 (Ala. Crim. App. 1991); Bracewell v. Bryan, 329 So.2d 552 (Ala. Civ. App. 1976) (“The failure to perform alone is not of itself evidence of intent not to perform at the time the promise was made. However, such failure may be considered together with other circumstances in reaching the determination as to whether the requisite intent existed at the time the promise was made.” [citations omitted]); People v. Catruna, 400 N.Y.S.2d 385, 386 (App. Div. 1977) (“A conviction for the crime of larceny by false promise upon proof of nonperformance alone cannot stand even though failure to perform is substantial evidence of a larcenous intent.”); Anderson v. Anderson, 620 S.W.2d 815, 818 (Tex. App. 1981) (“The intent not to perform the promise at the time it is made may be shown by circumstantial evidence including the acts and declarations of the person in securing the contract, as well as his subsequent conduct with respect to refusing to carry out the promise.” [citations omitted]). 27. William Shakespeare, King Henry VIII, act 4, sc. 2. 28. 825 P.2d 1122 (Idaho Ct. App. 1992). 29. Id. at 1134; see also In re Cornner, 191 B.R. 214, 226 (Bankr. N.D. Ala. 1995) (rejecting defendant’s attempted excuses for nonperformance); Hammonds v. Turnipseed, 709 So. 2d 39, 40 – 41 (Ala. Civ. App. 1997) (describing defendant who sold property to broker’s client under identical terms as earlier offer, but after brokerage agreement expired); Steed Realty v. Oveisi, 823 S.W.2d 195, 200 (Tenn. Ct. App. 1991) (stating that the fact that developer had no excuse for not making improvements was evidence of promissory fraud). 30. 994 F. Supp. 1369, 1379 (N.D. Ala. 1997). But see Mason & Dixon Lines, Inc. v. Byrd, 601 So. 2d 68, 69 (Ala. 1992) (affirming a judgment of promissory fraud, despite fact that employees who had promised to provide equipment to the claimant had left company prior to breach). 31. 477 So. 2d 322, 327 (Ala. 1985); see also IBP, Inc. v. FDL Foods, Inc., 19 F. Supp. 2d 944, 951 (N.D. Iowa 1998) (finding that claimant’s failure to respond to draft sales agreement explained why defendant accepted other offer); Morgan v. Inter-Continental Trading Corp., 232 F. Supp. 444, 452 (E.D. Wis. 1964) (finding that complaints about franchisee’s business practices and fact that franchisee extended territory beyond contracted limits explained defendant franchisor’s cancellation of franchise); Johnston v. Green Mountain, Inc., 623 So. 2d 1116 (Ala. 1993) (finding that travel agency’s new subcontract with another agency explained breach of promise to pay sales manager commissions on all sales); Upton v. Drummond Co., 762 So. 2d 373, 376 (Ala. Civ. App. 2000) (emphasiz-

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ing that defendant lost contract requiring claimant’s hauling services); Beaulieu v. Wynfrey Hotel, 718 So. 2d 83, 85 (Ala. Civ. App. 1998) (describing budgetary changes that could have explained dismissal of employee); Leventhal v. Martin, 266 N.Y.S.2d 774, 775 (App. Div. 1966) (finding that defendant’s postpromise financial reversals explained failure to perform stock sales agreement); In re Marriage of Auble, 866 P.2d 1239, 1245 (Or. Ct. App. 1993) (emphasizing that defendant sued for child support, violating agreement, only after discovering ex-wife’s income had increased considerably). 32. 713 So. 2d 967 (Ala. Civ. App. 1997). 33. Id. at 975. 34. 219 U.S 219, 248 (1911) (Holmes, J., dissenting). See also Commonwealth v. Rubin, 43 N.E. 200 (Mass. 1896) (Holmes, J.) (“In the case at bar, the conversion followed hard upon the receipt of the horse, and the inference is not unnatural that the intent existed from the beginning, as it is proved to have existed a very short time afterwards.”). 35. E. Allan Farnsworth, Changing Your Mind: The Law of Regretted Decisions 21–24 (1998). 36. 584 So. 2d 470 (Ala. 1991). 37. Id. at 473; see also Beijing Metals & Minerals Import/Export Corp. v. Am. Bus. Ctr., Inc., 993 F.2d 1178, 1186 (5th Cir. 1993) (describing supplier who repudiated agreement to ship products almost immediately after contract renegotiated); Sullivan v. Sullivan, 223 N.E.2d 461, 464 (Ill. App. Ct. 1967) (describing newly married woman who left husband days after receiving deed and within one month entered into adulterous relationship); Pulchny v. Pulchny, 555 S.W.2d 543, 546 (Tex. Civ. App. 1977) (stating that one month after receiving deed to house, defendant stopped caring for parents as agreed). But see Sanders v. First Nat’l Bank, 114 B.R. 507, 517 (M.D. Tenn. 1990) (holding that the onemonth period between bank’s promise not to institute collection procedures should claimant file for bankruptcy and breach of that promise was insufficient to satisfy Tennessee’s requirement of direct evidence of an intent not to perform). 38. Farnsworth distinguishes and describes two broad classes of reasons a promisor might change her mind due to the passage of time: improvidence and obsolescence. E. Allan Farnsworth, supra note 35, at 24 –27. 39. 667 So. 2d 696, 703 (Ala. 1995). 40. 431 So. 2d 515, 519 (Ala. 1983); see also Craft v. Metromedia, Inc., 766 F.2d 1205, 1220 (8th Cir. 1985) (emphasizing that television station’s concerns about an anchorwoman’s appearance increased gradually over years); Billy Baker Mobile Homes, Inc. v. Foster, 390 S.W.2d 385, 387 (Tex. Ct. App. 1965) (noting that mobile-home manufacturer had not yet constructed claimant’s trailer when it promised a solid sheet roof ). 41. See, e.g., O’Gorman v. Haber, 147 A. 882 (R.I. 1929) (affirming a finding of promissory fraud based on the defendant’s repeated assurances that he would pay overdue rent). 42. 528 N.E.2d 370 (Ill. App. Ct. 1988). 43. Id. at 194 (quoting Foster v. Dwire, 199 N.W. 1017, 10210 (N.D. 1924)); see also In re Cornner, 191 B.R. 214, 226 (Bankr. N.D. Ala. 1995) (where defendant made no efforts to redeem foreclosed property of the claimant as promised); Hanover Modular Homes of N. La.., Inc. v. Scottish Inns of Am., Inc., 443 F. Supp. 888, 891 (W.D. La. 1978) (stating that defendant made no attempt to order all of the hotel units promised); Walker v. Woodall, 262 So. 2d 756, 759 (Ala. 1972) (emphasizing that defendant never insured

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claimant as promised); Steed Realty v. Oveisi, 823 S.W.2d 195, 200 (Tenn. Ct. App. 1991) (noting that developer made no attempts to improve road or provide water or utilities as promised). 44. 368 So. 2d 284 (Ala. Civ. App. 1978). 45. Id. at 286. The decision of the Court of Civil Appeals was subsequently reversed in Southeastern Properties, Inc. v. Lee, 368 So. 2d 288 (Ala. 1979), a baffling decision by the Alabama Supreme Court. That court held that the claimant’s dissatisfaction with the work that the defendant did and statements by the defendant, made two years after the promise, that he did not intend to perform were sufficient evidence for the jury to find promissory fraud. 46. Morgan v. Inter-Continental Trading Corp., 232 F. Supp. 444, 452 (E.D. Wis. 1964); see also Wade v. Chase Manhattan Mortgage Corp., 994 F. Supp. 1369, 1379 (N.D. Ala. 1997) (stating that prior to change in management, defendant fulfilled promises to employee); Lively v. Garnick, 287 S.E.2d 553, 558 (Ga. Ct. App. 1981) (noting that contractor partially completed repairs for home buyer); Dailey Co. v. Am. Inst. of Mktg. Sys., Inc., 183 S.E.2d 444, 447 (S.C. 1971) (stating that prior to time when claimant stopped payments, defendant fulfilled its contractual obligations); Bank One v. Stewart, 967 S.W.2d 419 (Tex. App. 1998) (emphasizing that defendant paid note for five years before default and defendant’s accounting practices suggested it believed note would be paid). 47. Because a claimant must also prove reasonable reliance, it is also necessary to show that he wasn’t aware of any such unfavorable circumstances. See Restatement (Second) of Contracts § 171 cmt. b (1981) (stating that it is not reasonable to rely on the promisor’s intent “if performance is known not to be within his control)”; Restatement (Second) of Torts § 544 (“The recipient of a fraudulent misrepresentation of intention is justified in relying upon it if the existence of the intention is material and the recipient has reason to believe that it will be carried out.”). 48. Reid, Murdock & Co. v. Lloyd, 67 Mo. App. 513, 516 (Mo. Ct. App. 1896). See also Manly v. Ohio Shoe Co., 25 F.2d 384, 385 (4th Cir. 1928); Gillespie v. J. C. Piles & Co., 178 F. 886, 891 (8th Cir. 1910); Luhrig Coal Co. v. Ludlum, 69 N.E. 562, 564 (Ohio 1903); 27 Richard A. Lord, Williston on Contracts § 69:42 (4th ed. 2003); 37 Am. Jur. 2d Fraud and Deceit § 55 (“Effect of Insolvency and Concealment Thereof, or Act of Bankruptcy”) (2001); Robert William Garland, Note, Is Insolvency at the Time of Entering into a Contract Fraud in Esse? 11 U. Pitt. L. Rev. 666 (1950); Sheridan Morgan, Comment, 34 Mich. L. Rev. 850, 850 – 54 (1936); Recent Decisions, 32 Mich. L. Rev. 400, 407– 09 (1934); Recent Cases, 46 Harv. L. Rev. 1333, 1344 (1933); Solon D. Wilson, Comment, Fraud—Deceit— Purchase of Goods on Credit with the Intention not to Pay Therefor—Implied False Representations, 43 Cent. L.J. 266 (1896). One also finds reference to this sort of evidence in the famous Edgington v. Fitzmaurice. The defendants had represented an intent to use a loan for capital and other improvements. Lord Fry wrote: “It is not necessary to call attention to the evidence, that the Defendants knew at the time that a large proportion of the loan would have to be expended in paying pressing liabilities. . . . I come, therefore, to the conclusion, with regret, that this false statement was not only false in fact, but was false to the knowledge of the defendants.” 29 Ch. D. 459, 484 – 85 (Ch. App. 1885).

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49. 786 So. 2d 477 (Ala. 2000). 50. 135 Cal. Rptr. 802, 821 (Ct. App. 1977); see also Touche Ross, Ltd. v. Filipek, 778 P.2d 721, 727 (Haw. Ct. App. 1989) (describing bank that promised development help but had no development expertise); People v. Catruna, 400 N.Y.S.2d 385, 386 (App. Div. 1977) (describing criminal defendant whose financial situation was chaotic but who promised victim he was purchasing warehouse in order to induce him to loan him $25,000). 51. 601 So. 2d 68, 73 (Ala. 1992). 52. Thus in World Help v. Leisure Lifestyles, Inc., 977 S.W.2d 662 (Tex. App. 1998), the defendant agreed to provide the claimant loans to acquire a property and develop it as a retirement center, but before the funds were fully disbursed, the defendant filed for bankruptcy and was unable to complete performance. The court affirmed denial of summary judgment to the claimant based on the fact that there was no evidence that the defendant knew of its impending financial difficulties when it made the promise. Id. at 672. 53. Meredith Willson & Franklin Lacey, The Music Man, act 2, sc. 6 (1958). 54. See, e.g., Carson v. Milcrow Motor Sales, 5 N.W.2d 665, 666 (Mich. 1942) (“The fact that one knows at the time of a purchase that he is insolvent and fails to disclose that fact to the seller does not of itself render the purchase void. There also must be an intent on his part not to pay for the goods purchased.”[citations omitted]); West v. Graff, 55 N.E. 506, 508 (Ind. Ct. App. 1899) (“The fact that the purchasers were insolvent when the goods were sold and delivered to them, apparently in the regular course of business, and the inference, if it can be properly drawn from the meager evidence, that they knew of their inability at that time to pay all their debts, together with the fact that they mortgaged these goods and others, all constituting their stock of merchandise on hand, as indicated by the evidence, to a trustee, to pay certain presumably bona fide debts, giving greater preference to some of their creditors than others, did not alone warrant a conclusion that the purchase of the goods described in the complaint was fraudulent.”). 55. 107 N.W. 454, 456 (Wis. 1906). 56. For contemporary examples of findings of no promissory fraud despite evidence that the promisor knew she might not perform, see, e.g., Gewin v. TCF Asset Management Corporation, 668 So. 2d 523, 526 –27 (Ala. 1995) (finding that defendant knew release of mortgage might not be obtained, though sales contract was contingent on such release); Glendale Federal Savings & Loan Ass’n v. Marina View Heights Development Co., 135 Cal. Rptr. 802, 132 (Ct. App. 1977) (stating that defendants “knew that it would be difficult to meet the payment schedule and fulfill the terms of the agreements within the time specified but that they intended to fully perform if they had sufficient cash to do so” [internal quotation marks omitted]); Miller v. Fairchild Industries, Inc., 629 A.2d 1293, 1304 (Md. Ct. Spec. App. 1993) (holding defendant’s overoptimism about prospects of future employment not probative as to intent). See also 37 Am. Jur. 2d Fraud and Deceit §§ 53 (“Intention Not to Pay as Essence”), 54 (“Effect of Lack of Reasonable Expectation of Ability to Pay”) (2001). 57. 397 S.E.2d 720 (Ga. Ct. App. 1990). 58. Id. at 722; see also Gen. Wholesale Beer Co. v. Theodore Hamm Co., 567 F.2d 311, 314 (5th Cir. 1978) (emphasizing that defendant sold distributorship on same day he entered into sales contract with claimant); In re Cornner, 191 B.R. 214, 226 (Bankr. N.D. Ala. 1995)

Notes to Pages 125

(noting that defendant spent $4,000 that he had promised to use to help redeem foreclosed property). 59. 120 F. Supp. 2d 84, 108 (D. Mass. 1999). 60. 571 S.W.2d 130, 133 (Mo. Ct. App. 1978); see also IBP, Inc. v. FDL Foods, Inc., 19 F. Supp. 2d 944, 951 (N.D. Iowa 1998) (stating that defendant drafted purchase agreement and discouraged other buyers prior to breaching agreement to sell to claimant). 61. See United States v. York, 933 F.2d 1343, 1350 (7th Cir. 1991) (“The man who wins the lottery once is envied; the one who wins it twice is investigated.”); 2 Wigmore, Evidence § 302 (Chadbourn rev. 1979) (“[T]he recurrence of a similar result (here in the shape of an unlawful act) tends (increasingly with each instance) to negative accident or inadvertence or self-defense or good faith or other innocent mental state, and tends to establish (provisionally, at least, though not certainly) the presence of the normal, i.e., criminal, intent accompanying such an act; and the force of each additional instance will vary in each kind of offense according to the probability that the act could be repeated, within a limited time and under given circumstances, with an innocent intent.”). 62. See In re Cornner, 191 B.R. 214, 227 n. 10 (Bankr. N.D. Ala. 1995) (“Generally speaking, evidence of similar fraudulent acts is admissible to show a fraudulent intent, plan, or scheme, provided that the acts meet the requirements of similarity in nature and proximity in time. Specifically, and even more to the point in this case, evidence of other similar failures to perform may be considered to establish that a defendant never intended to perform a promise made.” [citations omitted]); Plante v. State, 692 S.W.2d 487, 493 (Tex. Crim. App. 1985) (“If a person repeatedly fails to pay for items purchased on credit, we believe the natural inference to be that he or she is seeking to obtain something for nothing.”). 63. For a similar fictional instance of this sort of evidence, see John Grisham’s novel The Rainmaker (Doubleday 1995), in which the fact that Great Benefit Insurance Company never performs its promise to compensate claims is found to be strong evidence that it never intended to do so. 64. 520 S.E.2d 481(Ga. Ct. App. 1999). 65. Id. at 484 (“Although similar transactions are generally inadmissible, they are admissible if committed at or about the same time, when the same motive can reasonably be supposed to exist, so as to establish the intent of the defendant in the transaction being tried.” [citations omitted]); see also People v. Docherty, 2 Cal. Rptr. 722, 724 (Ct. App. 1960) (stating that roofing contractor made same false sales pitch to numerous customers); Steed Realty v. Oveisi, 823 S.W.2d 195, 200 (Tenn. Ct. App. 1991) (noting that developer made similar misrepresentations to a number of purchasers). 66. 709 So. 2d 39, 42 (Ala. Civ. App. 1997); see also Chedick v. Nash, 151 F.3d 1077, 1083 (D.C. Cir. 1998) (stating that loan company had history of fraudulent behavior with mortgages); In re Cornner, 191 B.R. 214, 227 n. 10 (Bankr. N.D. Ala. 1995) (emphasizing previous similar failures to perform promises to redeem a mortgage for a fee); Baker v. State, 588 So. 2d 945, 947 (Ala. Crim. App. 1991) (emphasizing similar previous instance where a roofing contractor had failed to perform as promised); Breier v. Koncen Meat Co., 762 S.W.2d 499, 500 (Mo. Ct. App. 1988) (stating that defendant had improperly fired others before, denying commissions); People v. Catruna, 400 N.Y.S.2d 385, 387 (App. Div.

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1977) (holding that loans made by defendant immediately prior to the loan from victim “were germane to the issue of intention to perform the promises which induced [the victim] to make the loans and were properly admitted”); Atram v. Star Tool & Die Corp., 581 N.E.2d 1110, 1113 (Ohio Ct. App. 1989) (finding that defendant’s hiring in a little over a year of forty to sixty employees suggested that the employer never intended to keep the plaintiff on); Plante v. State, 692 S.W.2d 487, 493 (Tex. Crim. App. 1985) (emphasizing thirty-five previous instances where the defendant had failed to pay for items bought on credit). We find many examples of patterns of deception in cases applying Illinois law, which, as noted above, requires proof of a “scheme or device” to defraud in order to maintain an action for promissory fraud. See, e.g., Speakers of Sport, Inc. v. ProServ, Inc., 178 F.3d 862, 866 (7th Cir. 1999) (Posner, J.) (“By requiring that the plaintiff show a pattern, by thus not letting him rest on proving a single promise, the law reduces the likelihood of a spurious suit; for a series of unfulfilled promises is better (though of course not conclusive) evidence of fraud than a single unfulfilled promise.”). 67. See Dareh Gregorian, Corpses Piling Up—Crematorium Left Hundreds To Rot for Decades, N.Y. Post, Feb. 18, 2002, at 5. 68. 571 S.W.2d 130, 133 (Mo. Ct. App. 1978). 69. Id. at 132. 70. 601 So. 2d 68, 72 (Ala. 1992); supra p. 123. 71. In all, we have described three separate inferences from similar instances of nonperformance: (1) as evidence of a low objective probability of performance (scientific induction); (2) as evidence of that the defendant knew that the probability of her performance was low (attributed scientific induction) and thus didn’t intend to perform; and (3) as evidence that the breach in question was planned all along, since the best explanation of the similar patterns of nonperformance is that they were all intentional (the doctrine of chances). 72. 107 N.W. 454 (Wis. 1906); supra p. 124. 73. This obvious point can be put in terms of our analytic framework as follows. We have defined Pj as the probability that a promisor will realize an intention not to perform. That is, if a promisor intends not to perform, then Pp (1  Pj). We have also argued that, as a general matter, Pj will be close to 1, since it is much easier to realize an intention not to do something than an intention to do something and since promisors generally promise to do acts they would not otherwise do. Thus, as a general matter, (1  Pj)  Pp*, which means that the promisor’s fully warranting representation will be false if the promisor intends not to perform. Along the same lines, since promisors generally say that Pp  M only where M is relatively high, in most cases (1  Pj)  M and an intention not to perform will be evidence that the promisor’s definite-probability representation was false. The same sort of thing holds true, though less dramatically, where the promisor does not intend to perform, though she may not intend not to perform—where (1  Pj)  Pp  Pi. 74. It is worth noting that Rumpelstiltskin’s promise was apparently gratuitous. According to the story, the queen (née miller’s daughter) was obligated to give Rumpelstiltskin her first born and, for no apparent reason and for no consideration, Rumpelstiltskin offered

Notes to Pages 129–32

to change the terms of their agreement—to condition his obligation on her guessing his name within three tries. Whether such a gratuitous, unwritten modification is enforceable is open to debate. In chapter 7, however, we argue that lack of consideration should not be a defense to promissory fraud. See infra chapter 7 pp. 155 – 56. 75. 711 So. 2d 901 (Ala. 1997). 76. Another relevant situation is where the promisor’s intention to perform is conditioned on not receiving a better offer before performance is due. If that is her intention and if she is in fact likely to receive such an offer, then the objective probability of her performance may well be lower than she has represented. 77. See Restatement (Second) of Contracts § 261 (1981) (“Where, after a contract is made, a party’s performance is made impracticable without his fault by the occurrence of an event the non-occurrence of which was a basic assumption on which the contract was made, his duty to render that performance is discharged, unless the language or the circumstances indicate the contrary.”); U.C.C. § 2– 615 (1998) (“Except so far as a seller may have assumed a greater obligation and subject to the preceding section on substituted performance: (a) Delay in delivery or non-delivery in whole or in part by a seller . . . is not a breach of his duty under a contract for sale if performance as agreed has been made impracticable by the occurrence of a contingency the non-occurrence of which was a basic assumption on which the contract was made.”); id. § 3 –305(a)(1)(ii). 78. Restatement (Third) of Torts: General Principles § 2 (Discussion Draft, 1999). 79. 465 So. 2d 384 (Ala. 1985). 80. Id. at 387. 81. 608 S.W.2d 585 (Tenn. Ct. App. 1980). 82. Id. at 589. 83. Id. at 590 (internal quotation marks omitted). 84. See also In re Barrack, 217 B.R. 598, 607 (B.A.P. 9th Cir. 1998) (noting that defendant misrepresented financial condition in settlement negotiations); Chedick v. Nash, 151 F.3d 1077, 1081 (D.C. Cir. 1998) (stating that defendant repeatedly miscalculated monthly loan payments, forcing claimant to default); Hayes v. Irwin, 541 F. Supp. 397, 434, 438 (N.D. Ga. 1982) (finding defendant engaged in false accounting and slander to attempt to push partner out of business relationship); Walker v. Woodall, 262 So. 2d 756, 759 (Ala. 1972) (describing evidence that defendant falsely told claimant that he had insured claimant’s truck, and holding that “[f]rom this evidence, which could have been interpreted as a later misrepresentation, the jury could also infer that [the defendant] did not intend to have the truck insured at the time he promised to do so”); Yoon v. Alaska Real Estate Comm’n, 17 P.3d 779, 783 (Alaska 2001) (stating that broker failed to disclose to buyer that he represented seller as well); People v. Docherty, 2 Cal. Rptr. 722, 723 –24 (Ct. App. 1960) (noting that roofing contractor and criminal defendant lied about location of business, experience, and roofing process used); Kent v. White, 520 S.E.2d 481, 484 (Ga. Ct. App. 1999) (stating that defendant concealed from claimant that claimant had been terminated and continued to use claimant’s services); Breier v. Koncen Meat Co., 762 S.W.2d 499, 500 (Mo. Ct. App. 1988) (emphasizing that employer kept terms of employment contract secret and manipulated profits to increase his own share); People v. Catruna, 400 N.Y.S.2d 385, 386 (App. Div. 1977) (noting that criminal defendant

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falsely stated he was pharmacist to induce victim to provide loan); Basden v. Mills, 472 P.2d 889, 892–93 (Okla. 1970) (stating that when claimant objected to terms of loan contract, defendant assured claimants that they would get money immediately); Steed Realty v. Oveisi, 823 S.W.2d 195, 201 (Tenn. Ct. App. 1991) (noting that developer misleadingly referred to property as a “subdivision” and falsely represented that he would build clubhouse); Hill v. Heritage Resources, Inc., 964 S.W.2d 89, 110 –11 (Tex. App. 1997) (stating that defendants misrepresented their desire to sell oil rights); Warner Communications, Inc. v. Keller, 888 S.W.2d 586, 596 (Tex. App. 1994) (describing various misrepresentations defendants used to put off broker while negotiating with tenant). But see Keith v. Witt Auto Sales, Inc., 578 So. 2d 1269, 1273 (Ala. 1991) (not using fact that insurance representative falsely stated that insured’s car was being towed to his home state for repair, when repair had already begun elsewhere as evidence supporting promissory fraud). 85. 191 B.R. 214 (Bankr. N.D. Ala. 1995). 86. 624 S.W.2d 728 (Tex. App. 1981). 87. Id. at 733; see also United Cos. Fin. Corp. v. Brown, 584 So. 2d 470, 473 (Ala. 1991) (stating that defendant contractor repeatedly told claimant that work would be completed); Baker v. State, 588 So. 2d 945, 947 (Ala. Crim. App. 1991) (noting that criminal defendant repeatedly assured victim that he would complete roofing work); Bracewell v. Bryan, 329 So.2d 552, 555 (Ala. Civ. App. 1976) (describing evidence that employer assured employee that he would receive commissions, and holding “[t]he jury here could . . . have interpreted [the supervisor’s] remark [that he would receive commissions and they would vary] as a later misrepresentation, and inferred from it the requisite intent”); Yoon v. Alaska Real Estate Comm’n, 17 P.3d 779, 783 (Alaska 2001) (finding real-estate agent’s denial of promise to take care of certain repairs—“‘Did I ever guarantee anything in writing about the property?’”—relevant to determining an intent not to perform); Steed Realty v. Oveisi, 823 S.W.2d 195, 200 (Tenn. Ct. App. 1991) (stating that for several years developer assured purchasers of lots that improvements would be made). 88. See King v. Tubb, 551 S.W.2d 436, 441 (Tex. Civ. App. 1977) (stating the defendant denied making a promise to help develop shortly after making promise). Note, however, that the court in King does not differentiate between in-court denials and out-of-court denials. 89. Bower v. Weisman, 674 F. Supp. 113, 118 (S.D.N.Y. 1987) (finding defendant’s denial of contract relevant to determining intent not to perform); Hill v. Heritage Resources, Inc., 964 S.W.2d 89, 132 ( (Tex. App. 1997) (“A party’s denial that he ever made a promise is a factor showing no intent to perform when he made the promise.” [citation omitted]); Warner Communications, Inc. v. Keller, 888 S.W.2d 586, 595 (Tex. App. 1994) (“Denial that a promise was made is a factor in showing no intent to perform.”); Texas Employers’ Ins. Ass’n. v. Baeza, 552 S.W.2d 862, 865 (Tex. Civ. App. 1977) (finding defendant’s denials of promise of permanent employment in compromise settlement agreement sufficient to find promissory fraud, and stating “[the defendant’s] repeated denials of making the promise or representation together with his testimony that he had no authority to make same, constitutes conclusive evidence of his intent not to perform at the time that he made the representation.”).

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90. Bond v. Duren, 520 S.W.2d 460, 463 (Tex. Civ. App. 1975) (“While mere failure to perform is not sufficient to prove the existence of an intention not to perform at the time the promise is made, where the party allegedly making the promise denies making the promise, there is sufficient evidence to support a finding that there was the absence of intention to perform when it was made.” [citation omitted]); Stone v. Williams, 358 S.W.2d 151, 155 (Tex. Civ. App. 1962) (holding that “where the party allegedly making the promise denies making the promise, there is sufficient evidence to support a finding that there was the absence of intention to perform when it was made”). But see Desfosses v. Wallace Energy, Inc., 836 F.2d 22, 31 (1st Cir. 1987) (rejecting defendant’s denial of promise as evidence, based on other evidence that defendant did intend to perform); H. C. Schmieding Produce Co. v. Cagle, 529 So. 2d 243, 245, 249 (Ala. 1988) (ignoring promisor’s denial of promise to purchase crop from claimant and finding no evidence of an intent not to perform); T. O. Stanley Boot Co. v. Bank of El Paso, 847 S.W.2d 218, 222 (Tex. 1992) (“Denying that a promise has been made is a factor showing no intent to perform when the promise was made. The record reveals that [the defendant] denied that there was a line of credit for $500,000. This testimony alone, however, does not constitute evidence that the Bank never intended to perform its promise.” [citations omitted]). 91. Conn. Gen. Life Ins. Co. v. Jones, 764 So. 2d 677, 683 (Fla. Dist. Ct. App. 2000). 92. Holland v. Lentz, 397 P.2d 787, 796 (Or. 1964) (quoting McCreight v. Davey Tree Expert Co., 254 N.W. 623, 625 (Minn. 1934); see also Brown v. N. Cent. F.S., Inc., 987 F. Supp. 1150, 1157 (N.D. Iowa 1997) (“‘[I]t would be as wrong morally as legally, as offensive to logic as to law, to hold that mere denial and non-performance are evidence that, if a promise was made, it was made fraudulently. . . . Bad, indeed, would be the case of the honest man who has made no such promise if, when falsely charged with it, he may not deny it without having his truth considered as some evidence either that there was such undertaking or that it was deceitfully made.’” [alteration in original] [quoting Int’l Travel Arrangers v. NWA, Inc., 991 F.2d 1389, 1403 (8th Cir. 1993)]); Barbouti v. Munden, 866 S.W.2d 288, 296 (Tex. App. 1993) (“Denial that a promise was made alone does not constitute evidence that the defendant never intended to perform his promise.” [citation omitted]). 93. See, e.g., United States v. Paccione, 949 F.2d 1183 (2d Cir. 1991) (upholding conviction for false promise in waste-disposal scheme); United States v. Mucci, 630 F.2d 737 (10th Cir. 1980) (upholding a conviction where the defendant had defrauded the victim of $110,000, claiming it was an advance fee for obtaining an offshore credit); People v. Docherty, 2 Cal. Rptr. 722 (Ct. App. 1960) (upholding conviction of roofing contractors operating fraudulent business); Miller v. State, 535 N.E.2d 170 (Ind. Ct. App. 1989) (upholding conviction in false-advertising scheme). 94. 993 F.2d 1178, 1180 (5th Cir. 1993); see also Abbott v. Abbott, 195 N.W.2d 204, 207–08 (Neb. 1972) (noting that defendant placed disclaimer in receipt for cattle); Galmish v. Cicchini, 734 N.E.2d 782 (Ohio 2000) (describing defendant who insisted on one-year term of contract and then acted to thwart condition precedent until after a year had passed); Basden v. Mills, 472 P.2d 889 (Okla. 1970) (stating that defendant drafted sales document vaguely, allowing him to breach oral assurances). 95. 554 So. 2d 983, 987 (Ala. 1989); see also Hanover Modular Homes of N. La., Inc. v. Scot-

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tish Inns of Am., Inc., 443 F. Supp. 888, 892 (W.D. La. 1978) (noting that defendant’s employees acted to frustrate claimant’s ability to fulfill defendant’s orders, forcing delays that were in defendant’s interest); Rivas v. Cantu, 37 S.W.3d 101, 118 (Tex. App. 2000) (stating that defendant took actions to force claimant out of business after promising to share ownership and profits); Pulchny v. Pulchny, 555 S.W.2d 543, 545 (Tex. Civ. App. 1977) (emphasizing that after promising to care for elderly parents in exchange for deed, defendant treated parents rudely and eventually ejected them from house). 96. 709 So. 2d 39, 43 (Ala. Civ. App. 1997); see also Gibson v. John D. Campbell & Co., 624 S.W.2d 728 (Tex. App. 1981) (noting that defendant stopped providing assurances that work would be completed only after expiration of four-year statute of limitations). 97. 669 So. 2d 817 (Ala. 1995). For a similarly structured fact pattern, see US Diagnostic, Inc. v. Shelby Radiology, P.C., 793 So. 2d 714, 720 (Ala. 2000) (stating defendant had motive to deceive claimant about its intent to enter into contract for radiology services, since “defendants would be in a better bargaining position after [the plaintiff] had executed the employment contract with . . . the fourth radiologist,” who was hired in reliance on the defendant’s representation that it would enter into contract). 98. 588 So. 2d 945 (Ala. Crim. App. 1991). 99. 533 N.E.2d 546, 551 (Ill. App. Ct. 1989). 100. As we have pointed out, an agent acting on behalf of a principal, which is always the case when the promisor is a corporation, does not necessarily know the principal’s intent. 101. The one exception to this general presumption should be fully warranting representations, which say that performance is so likely that it is in the promisee’s interest to rely. If a promisor is mistaken about the promisee’s participation constraint—because, say, the promisee will incur unusually high costs in case of breach—then she might be mistaken as to the meaning of her warranting representation. It is thus highly relevant to the correct decision in Lumpkin that, when the defendants made their warranting representations, they knew that the claimants’ lease would be virtually worthless if they failed to perform. In the case of warranting representations, it makes sense to leave the burden on the claimant to show that the promisor was aware of his participation constraint. 102. In linking motive evidence only to proof of intent, not recklessness, we depart from the approach that Gardner takes in evaluating the use of motive evidence in criminal cases. Martin R. Gardner, The Mens Rea Enigma: Observations on the Role of Motive in the Criminal Law Past and Present, 1993 Utah L. Rev. 635, 724 – 32 (1993). Gardner argues that motive evidence is relevant in evaluating recklessness but is probably too prejudicial as evidence of intent. At least in the civil law, recklessness is an objective concept, and we therefore see little role for motive evidence. And while we have our doubts about whether the prejudicial quality of motive evidence usually outweighs its probative value in the criminal context, certainly that is not the case in contract cases. Here the motive we impute to the promisor is just economic gain—not the sort of evil purpose that is likely to turn a jury against the defendant. Cf. id. at 728 – 31 (discussing a murder case where the prosecution imputed to the defendant a motive to kill her children).

Notes to Pages 135–43

103. Conn. Gen. Life Ins. Co. v. Jones, 764 So.2d 677, 683 (Fla. Dist. Ct. App. 2000) (also rejecting the defendant’s denial of the promise as evidence of initial intent). 104. Both Rp and Rb could be expanded into more complex terms. The promisor’s benefit in either case will be, roughly speaking, the value of the promisee’s performance, discounted by the probability he will perform plus the value of any damages in the case of breach, discounted by the probability of breach and by the probability of enforcement less additional costs incurred in the case of the promisor’s breach, discounted by the probability of her breach. 105. The promisor’s net expected benefits can be expressed as a function of the probability of performance: f(Pp )  (Pp )(Rp )  (1  Pp)(Rb )  (Pp )(CA)  (1  Pp )(D)

106.

107. 108. 109. 110.

111. 112.

We can then arrive at (2) by comparing the net expected benefits assuming certain breach (f(0)  Rb  D) with the net expected benefits assuming certain performance (f(1)  Rp  CA). In fact, what we have here is a general conundrum concerning motive evidence and legal deterrence. We can put this in Calabresi and Melamed’s terms by saying that the whole point of property rules is to undermine a potential entitlement taker’s motive for a nonconsensual taking. The conundrum also appears in deterrence accounts of criminal law, according to which criminal sanctions are structured to realize the maxim “Crime doesn’t pay.” Imagine a murder defendant objecting to the admission of the fact that she was the beneficiary of the decedent’s will as evidence of motive by arguing that the prospect of criminal punishment far outweighed any monetary benefit she could have expected from the murder. True though this might be, criminals still find it in their interest to commit crimes and, despite the existence of criminal sanctions, it makes sense to admit evidence showing that a particular defendant had a unique motive to commit the crime. Supra chapter 5 pp. 110 –12. 601 So. 2d 68, 72 (Ala. 1992). Id. at 73. See also Berkeley Bank for Coops. v. Meibos, 607 P.2d 798, 801 (Utah 1980) (finding the fact that claimants required promise not to collect on notes evidence that defendant in fact made such a promise). Probative but not decisive. Recall our point about the other ways in which a promisor can benefit from a promisee’s reliance. See, e.g., Pinyan v. Cmty. Bank, 644 So. 2d 919 (Ala. 1994); Shirley v. Cmty. Bank, 690 So. 2d 421 (Ala. Civ. App. 1997).

CHAPTER 7: THE LANDSCAPE OF PROMISSORY MISREPRESENTATION

1. Keeton covered some of the same ground we do in this chapter, coming to some different conclusions, in a 1937 note. W. Page Keeton, Note, Fraud—Statements of Intention, 15 Tex. L. Rev. 185, 198 –216 (1937).

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2. Prosser & Keeton on Torts § 109, at 762 (5th ed. 1984). 3. Restatement (Second) of Torts § 530 (1977). The Restatement also stipulates that “[t]he recipient of a fraudulent misrepresentation of intention is justified in relying upon it if the existence of the intention is material and the recipient has reason to believe that it will be carried out.” Id. at § 544. This simply restates the general rule for justifiable reliance and applies it to representations of intention. Id. at § 538. 4. Id. at § 530(1) cmt. b. 5. 49 S.W.2d 513 (Tex. Civ. App. 1932). For other examples, see 37 Am. Jur. 2d Fraud and Deceit § 148 (2001). 6. Keeton, supra note 1, at 188 – 92. 7. Id. at 189 –90. 8. See generally Robert Prentice, Vaporware: Imaginary High-Tech Products and Real Antitrust Liability in a Post-Chicago World, 57 Ohio St. L. J. 1163 (1996); Samuel Rabino & Thomas E. Moore, Managing New-Product Announcements in the Computer Industry, 18 Indus. Marketing Mgmt. 35 (1989). While vaporware has been widely discussed among those who follow the computer industry, the practice has not been the subject of much litigation. The most well-known judicial discussion of the practice is in the district court’s opinion in United States v. Microsoft, 159 F.R.D. 318 (D.D.C. 1995). There Judge Sporkin rejected a proposed settlement partly on the basis of what he saw as evidence of vaporware: The Court has been particularly concerned about the accusations of “vaporware.” . . . Microsoft could unfairly hold onto [its dominant position in the operating-systems market] with aggressive preannouncements of new products in the face of the introduction of possibly superior competitive products. In other words, all participants concede that consumers and [equipment manufacturers] will be reluctant to shift to a new operating system, even a superior one, because it will mean not only giving up on both its old operating systems and applications, but also risking the possibility that there will not be adequate applications to run on the superior product. If this is true, Microsoft can hold onto its market share gained allegedly illegally, even with the introduction of a competitor’s operating system superior to its own. By telling the public, “we have developed a product that we are about to introduce into the market (when such is not the case) that is just as good and is compatible with all your old applications,” Microsoft can discourage consumers and [equipment manufacturers] from considering switching to the new product. Id. at 334 – 35. The D.C. Circuit, however, considered Judge Sporkin’s reliance on the accusations of vaporware, which had not been made in the government’s complaint, to be legally erroneous and reversed and remanded the case to another judge. U.S. v. Microsoft Corp., 56 F.3d 1448, 1463 (D.C. Cir. 1995). In 1996, Caldera Inc. brought an antitrust action against Microsoft in which it made similar claims of anticompetitive uses of vaporware. The district court rejected Microsoft’s motion for summary judgment on the vaporware claim, finding that, given the evidence Caldera had introduced, “a genuine question of fact has been raised as to whether Microsoft made knowingly false statements, or otherwise engaged in anticom-

Notes to Pages 144–45

9. 10. 11.

12.

13. 14.

petitive behavior with respect to its ‘product preannouncement’ practices.” Caldera, Inc. v. Microsoft Corp., 87 F. Supp. 2d 1244, 1248 (D. Utah 1999). While the suit never went to trial, it apparently had some merit, as Microsoft settled for what was probably more than $150 million. See Sara Robinson, Microsoft and Caldera Settle Antitrust Suit, N.Y. Times, Jan. 11, 2000, at C2. See also Berger v. Ludwick, Nos. C-97-0728-CAL, C-97-2347-CAL 2000 WL 1262646, at *8 (N.D. Cal. Aug. 17, 2000) (where the plaintiffs alleged securities fraud based in part on vaporware, holding that the complaint did not sufficiently allege intent or recklessness to survive a motion to dismiss on the pleadings); Cal. State Auto. Ass’n Inter-Ins. Bureau v. Policy Mgmt. Sys. Corp., No. C-93-4232, 1996 WL 45280, at *11 (N.D. Cal. Jan. 9, 1996) (denying, on the basis of California’s recognition of the action of promissory fraud, Cal. Civ. Code § 1710, the defendant’s motion to dismiss a claim of fraud through vaporware); TBG, Inc. v. Bendis, 841 F. Supp. 1538, 1562 (D. Kan. 1993) (denying the defendants summary judgment on the plaintiffs’ claims of securities fraud through vaporware). Prentice, supra note 8, at 1180. Id. at 1181 (quoting Stephen Manes & Paul Andrews, Gates: How Microsoft’s Mogul Reinvented an Industry and Made Himself the Richest Man in America 421 (1994)). Where there is no proof of scienter, we would be more hesitant to impose compensatory damages like those we advocate for nonfraudulent promissory misrepresentations between parties to a contract. Vaporware announcements are made to the public at large, and we are worried both about the chilling effect of potential liability and about overincentivizing reliance and litigation. Steve Wood has said that in its early days, Microsoft “would always underestimate” time of completion, and one Microsoft employee was quoted as saying that Microsoft “basically announced the [Windows] product when we hadn’t even designed it yet.” Prentice, supra note 8, at 1179 (citing James Wallace & Jim Erickson, Hard Drive: Bill Gates and the Making of the Microsoft Empire 120 –21, 135 – 36 [1992]), 1181 (citing Manes & Andrews, supra note 10, at 241). See also U.S. v. Microsoft Corp., 159 F.R.D. 318, 335 (D.D.C. 1995) (discussing internal documents that indicated that Microsoft knowingly used vaporware to block competitors’ products); Caldera, Inc. v. Microsoft Corp., 87 F. Supp. 2d 1244, 1248 (D. Utah 1999) (same). Prentice, supra note 8, at 1185 (quoting Manes & Andrews, supra note 10, at 461). The earliest formulation of the existing fact doctrine comes from the fifteenth century, when Justice Choke wrote that “one cannot warrant a thing which will happen in the future.” Choke, J., in Y.B. 11 Edw. IV, 6. See also Sutherland on Damages § 1167 (3d ed. 1903); Williamson v. Holt, 61 S.E. 384, 387 (N.C. 1908) (“[The misrepresentation] must be as to matters of fact, substantially affecting his interests, not as to matters of opinion, judgment, probability, or expectation.”). While this rule is in steep decline, it has far from disappeared. See, e.g., Holly Homes, Inc. v. Urban Hous. Group, Ltd. P’ship, 84 Wash. App. 1060, 1997 WL 3199, *4 (Ct. App. 1997) (unpublished opinion) (“Here, [plaintiff] claims that [defendant] misrepresented the probability that tenants would purchase their units. But this representation did not involve an existing fact.”); 37 Am. Jur. 2d Fraud and Deceit §§ 62 (“Exceptions as to Expression of Opinion; What Consti-

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tutes Opinion Generally”), 80 (“Statements as to Events in the Future: General Rule Against Liability”) (2001) (both citing cases). Early cases often fail to differentiate between prediction and opinion. One explanation for this is that many of the situations dealt with in the early cases make them more or less interchangeable. Thus the paradigmatic nineteenth-century fraud action arose in the sale of some piece of property, often farming land or some other durable good. See e.g. Cooper v. Schlesinger, 111 U.S. 148 (1884) (sale of large quantity of steel spring); Stonemets v. Head, 154 S.W. 108 (Mo. 1913) (misrepresentation as to the productivity of farm land). In this context, the alleged fraud had to do with statements made about the quality of the property. Descriptions of quality would often relate not just to the land’s present condition, or the present productivity of a factory, but also to how much corn would be brought in at the next harvest or how many widgets would be produced over the next year. In this context, there is no clear distinction between an assessment of the property’s present worth and its future performance: both relate to its quality, and both may not be justifiably relied upon because they are mere opinion. 15. Prosser & Keeton on Torts § 109, at 762 (5th ed. 1984). 16. Id. See also Restatement (Second) of Contracts § 169(b) (“To the extent that an assertion is one of opinion only, the recipient is not justified in relying on it unless the recipient . . . reasonably believes that, as compared with himself, the person whose opinion is asserted has special skill, judgment or objectivity with respect to the subject matter.”). 17. Prosser & Keeton on Torts § 109, at 762 (5th ed. 1984). 18. Restatement (Second) of Torts § 525 cmt. f (1977) 19. It would be unfair to say that Prosser and Keeton, as well as the drafters of the Restatement, completely miss this dimension. When they say that the prediction represents something about the speaker’s knowledge, they are using a concept that suggests both something about the speaker’s mental state and something about the world outside. If knowledge is justified true belief, then to represent that you know something (as opposed to merely believe it) is to say something about the world “out there.” The account is not transparent, however, since it doesn’t disaggregate the subjective from the objective representation. James and Gray have what we consider a more felicitous formulation, writing: “[C]ourts have been increasingly willing to hold predictive statements material where the circumstances indicate to the addressee that the speaker has a factual basis for his prediction so that the existence of facts is implied by the representation.” Fleming James Jr. & Oscar S. Gray, Misrepresentation (pt. 2), 37 Md. L. Rev. 488, 507– 8 (1978). 20. Just what probability a general prediction represents will depend, of course, on context—on what is commonly known about the general ability of persons to predict such events, about the speaker’s particular expertise, about the speaker’s record of success in making such predictions, and so on. 21. See, e.g., Sonesta Int’l. Hotels Corp. v. Wellington Assoc., 483 F.2d 247, 251 (2d Cir. 1973) (“To be material a statement in a tender offer need not necessarily relate to a past or existing condition or event. It may refer to a prospective event, even though the event may not occur, provided there appears to be a reasonable likelihood of its future occurrence.”); Walter C. Somol, Dredging the Safe Harbor for Forward-Looking Statements—

Notes to Pages 147–49

An Analysis of the Private Securities Litigation Reform Act’s Safe Harbor for Forward-Looking Statements, 32 Suffolk U.L. Rev. 265, 268 –75 (1998). Section 10(b) can also be the vehicle for claims of promissory fraud. See, e.g., Wharf (Holdings) Lmt. v. Int’l Holdings, 532 U.S. 588 (2001). 22. See, e.g., Rubinstein v. Collins, 20 F.3d 160, 169 (5th Cir. 1994) (“Plaintiffs have satisfied the pleading requirements for scienter. They have claimed that the defendants either knew—or were recklessly indifferent to—the fact that the predictive statements did not have a reasonable basis.”); First Virginia Bankshares v. Benson, 559 F.2d 1307, 1314 (5th Cir. 1977) (“An opinion or prediction is actionable if there is a gross disparity between prediction and fact.”); Marx v. Computer Scis. Corp., 507 F.2d 485, 490 (9th Cir. 1974). 23. 15 U.S.C. §§ 77z-2(c)(1)(B)(i), 78u-5(c)(1)(B)(i). 24. See William H. Kuehnle, On Scienter, Knowledge, and Recklessness under the Federal Securities Law, 34 Hous. L. Rev. 121, 131– 32 (1997). 25. 133 N.W.2d 267 (Wis. 1965). 26. See, e.g., Jason S. Johnston, Communication and Courtship: Cheap Talk Economics and the Law of Contract Formation, 85 Va. L. Rev. 385 (1999); E. Allan Farnsworth, Precontractual Liability and Preliminary Agreements: Fair Dealing and Failed Negotiations, 87 Colum. L. Rev. 217 (1987). 27. 133 N.W.2d at 274. 28. Farnsworth discusses the possibility of imposing precontractual liability on the basis of misrepresented intent, arguing that “[i]mplicit in the act of negotiating is a representation of a serious intent to reach agreement with the other party.” Farnsworth, supra note 26 at 234. He describes a few cases where the idea has been applied but concludes that “courts have rarely applied the law of misrepresentation to failed negotiations.” Id. at 235. Barnett and Becker also discuss the possibility of imposing liability for misrepresentation in Red Owl–type situations and conclude that promissory estoppel is appropriate mainly because the law of promissory fraud is insufficiently developed. Randy E. Barnett & Mary E. Becker, Beyond Reliance: Promissory Estoppel, Contract Formalities, and Misrepresentations, 15 Hofstra L. Rev. 443, 485 –95 (1987). Thus they explain the imposition of promissory estoppel in Red Owl by reference to the idea that “liability [is] appropriate when a promisor makes a promise in order to induce desired and detrimental reliance with the knowledge (or under circumstances such that he should know) that the promisee will consider the promise more reliable than it actually is.” Id. at 490–91. They therefore suggest that promissory estoppel is here plugging a gap in the law of promissory misrepresentation: “The courts using promissory estoppel to impose liability for negligent promissory misrepresentation could reach the same result under tort, by changing the standard for promissory misrepresentation from lie-when-made to negligent or reckless. For over a hundred years, however, common law courts have repeatedly held that tort liability for promissory misrepresentation requires that the promise be a lie when made.” Id. at 492. One of our proposals, of course, is to expand liability for promissory misrepresentations in just the direction Barnett and Becker describe. See also Wilma Corp. v. Fleming Foods of Alabama, 613 So.2d 359 (Ala. 1993); Markov v. ABC Transfer & Storage Co., 457 P.2d 535 (Wash. 1969). 29. The parties can explicitly opt out of such representations. Consider the following prob-

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lem posed to Randy Cohen’s ethics column in the Sunday New York Times Magazine: “Telemarketers offered us a free weekend at a fabulous ski resort if we attend a one-hour sales presentation. I’d love to go, but my husband thinks it would be unethical since we have absolutely no intention of purchasing.” Randy Cohen, The Ethicist, N.Y. Times Mag., Nov. 5, 2001, at 22. Such offers typically come with a “No purchase required” clause, which we think is enough to defeat the default representation of an intent to consider the offer. In fact, this may be an example where, since the parties have explicitly opted out of contract-type damages, we should allow there to be no representation of intent at all. (See the discussion of TINALEA clauses below.) 30. 16 CFR § 238.0 (1967) (emphasis added). 31. See Wade R. Habeeb, Validity, Construction and Effect of State Legislation Regulating or Controlling “Bait and Switch” or Disparagement Advertising or Sales Practices, 50 A.L.R. 3d 1008 (1973). 32. Murphy, Speidel & Ayres, Studies in Contract Law 252 (6th ed. 2003). 33. 86 N.W.2d 689 (Minn. 1957). 34. Id. at 690. 35. Restatement (First) of Contracts § 473 cmt. d (1932) (“Though a promise that could in no event be binding, or a mere prediction, may involve the same representation of mental attitude as if the promise were made for sufficient consideration, the representation is not fraud unless there is implied . . . an assertion of other facts. One who is informed as to the law would not be deceived, and the consequences of ignorance of the law are here, as generally, not sufficient basis on which to found legal relief.”). For examples of this doctrine in action, see Note, Fraud—Misrepresentation of Intention—Promise Unenforceable as Such, 16 Tex. L. Rev. 407 (1938); Note, Fraud—Promissory Representations— Parol Evidence Rule, 16 Tex. L. Rev. 408 (1938). 36. Restatement (Second) of Contracts § 171(2) (1981). The Second Restatement of Torts states that an action for promissory fraud lies “whether or not the promise is enforceable in contract.” Restatement (Second) of Torts § 530 cmt. c (1977). 37. 88 F. Supp. 2d 116 (S.D.N.Y. 1999), aff’d 210 F.3d 88 (2d Cir. 2000) (per curiam). 38. A number of cases have rejected promissory fraud claims on similar grounds. See, e.g., Shirley v. Cmty. Bank, 690 So. 2d 421 (Ala. Civ. App. 1997) (loan officer’s assurances that approval was likely was mere enthusiasm, not promise); Bulbman, Inc. v. Nevada Bell, 825 P.2d 588 (Nev. 1992) (representation that telephone installation would take thirty minutes and that there would be no problems mere puffery); Dowling v. NADW Marketing, Inc., 625 S.W.2d 392 (Tex. App. 1981) (statement in newspaper ad of a “firm buy back agreement” mere dealer’s talk, not a promise); Stone v. Enstam, 541 S.W.2d 473 (Tex. Civ. App. 1976) (unduly optimistic predictions cannot be the basis for promissoryfraud action). But see Joe Manuel & Stuart James, Tennessee’s Theories of Misrepresentation, 22 Memp. St. U.L. Rev. 633, 650 (1992) (worrying that “[t]he practical effect of promissory misrepresentation may be that, in some instances, typical sales talk and puffery is elevated to a level of actionable misrepresentation”). 39. 1 Q.B. 256 (1893). 40. Id. at 257. 41. The reader may recall that we are even more skeptical of using a defendant’s testimony

Notes to Pages 152–53

that she never uttered the words in question, which can put a nonpromisor in the unattractive position of either having to admit to a promise she never made or open herself up to liability for promissory fraud. That is a different situation, however, from the case in which the defendant testifies to her intent in order to establish the meaning of words she admittedly uttered—for example, whether they were mere puff. Here there is no double bind so long as courts insist on satisfaction of the scienter requirement. 42. 722 F. Supp. 454, 460 (N.D. Ill. 1989). 43. Id. at 459. 44. When he was seeking to hire the claimant, the defendant stated both orally and in a letter that her pay package would include a profit-sharing element. This was then confirmed after she was hired in a “terms and conditions” letter, which read: “[T]he incentive program outlined in [the earlier letter] goes into effect immediately.” Id. at 458. 45. It’s worth comparing Posner’s opinion in Speakers of Sport, Inc. v. ProServ, 178 F.3d 862 (1999), in which the Seventh Circuit affirmed summary judgment against a promissoryfraud claimant in part on the grounds that the alleged promise was in fact mere puff. 46. Our conclusions about how promissory fraud can stem the potential misuse of these rules apply also to other mandatory formal limits on contracting like the Rule against Perpetuities, time restrictions on agreements not to compete, and even statutes of limitation. The same arguments also apply to consent-protecting rules like the requirement of a capacity to contract. A minor who is legally unable to enter into a mutually binding contract should be held liable if she attempts to turn this shield into a sword by entering into or intending to raise the defense of incapacity. See Keeton, supra note 1, at 210 –13. 47. James & Gray, supra note 19, at 507 (emphasis added, footnote omitted). 48. We are not the first to notice this. See George N. Stepaniuk, Note, The Statute of Frauds as a Bar to an Action in Tort for Fraud, 53 Fordham L. Rev. 1231, 1240 –47 (1985) (citing cases); Evan M. Zuckerman, Note, Promissory Fraud in Tennessee: A Wrong without a Remedy, 10 Memph. St. U. L. Rev. 308, 332– 33 (1980); James & Gray, supra note 19, at 507–08; Keeton, supra note 1, at 200 – 09. Section 209(a)(2) of the Uniform Computer Information Transactions Act captures a similar idea by limiting the waivability of express promises made in mass market retail advertisements. U.C.I.T.A. § 209(a)(2) (2002). For example, it would be fraudulent to run an ad campaign proclaiming a “ninety-day right to a refund,” while simultaneously crafting a formal mass-market license agreement altering that right. The reasoning behind this rule fits comfortably within our theory. 49. Thus courts have rejected promissory fraud claims based on the principle that “if an action in fraud were allowed to be brought on promises which are unenforceable as contracts, the legislative policy of the [Statute of Frauds] would be defeated.” General Corp. v. General Motors Corp., 184 F. Supp. 231, 234 (D. Minn. 1960). 50. See, e.g., Bank of Am. Nat’l Trust & Sav. Assoc. v. Pendergrass, 48 P.2d 659, 661 (Cal. 1935). See also Justin Sweet, Promissory Fraud and the Parol Evidence Rule, 49 Cal. L. Rev. 877, 889 n. 73, 896 –97 (1961); Margaret C. Johnson, Note, Contracts—Fraud—Misrepresentation of State of Mind—Parol Evidence, 17 N.C. L. Rev. 32, 35 – 36 (1938 –1939). 51. See Goldsmith v. Vrooman, 23 S.E.2d 504 (1932); Stepaniuk, supra note 48, at 1247–50; 37 Am. Jur. 2d Fraud and Deceit § 95 (“Promises Made with Intention not to Perform:

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Effect of the Statute of Frauds; Parole Evidence Rule”) (2001). Sweet considers and rejects other possible limitations on recoverable damages as a way of splitting the difference. Sweet, supra note 50, at 897–903. 52. 631 P.2d 540 (Arizona Ct. App. 1980). 53. Id. at 547– 48 (citations omitted). 54. Alternatively, it has been suggested that there can be no action for promissory fraud, since where there is no consideration, there can be no reasonable reliance. Barrier v. Brinkmann, 109 S.W.2d 462, 466–67 (Tex. 1937); Clarence C. Kunc, Note, Fraud— Misrepresentations of Intent, 19 Neb. L. Bull. 39, 40 (1940) (citing 51 A.L.R. 94). 55. Ricketts v. Scothorn, 77 N.W. 365 (Neb. 1898) 56. Desnick v. American Broadcasting Companies, Inc., 44 F.3d 1345, 1354 (7th Cir. 1995). 57. A more moderate proposal for protecting the consideration requirement would be a rule that without consideration there can be no recovery for nonfraudulent promissory misrepresentation. And it is true that it is significantly easier to prove nonfraudulent promissory misrepresentation than it is to show promissory fraud, since the former doesn’t require evidence of scienter. We would argue, however, that even establishing nonfraudulent promissory misrepresentation is so difficult that the action poses no real threat to the consideration requirement. (Think about how hard it is to show reasonable reliance on a gratuitous promise.) We therefore think liability for promissory misrepresentation remains appropriate. 58. 287 P.2d 735 (Wash. 1955). 59. Id. at 737 (emphasis in original). 60. Id. at 738. But see Blake v. Paramount Pictures, Inc., 22 F. Supp. 249, 253 (S.D. Cal. 1938) (finding that an illusory promise with a liquidated-damages clause was essentially a disjunctive promise to perform or pay damages and holding that “where the obligation indicates clearly that it contemplates the performance of one only of two acts, in the alternative, no fraud . . . can exist unless both promises were made without the intention to perform”). 61. Keeton comes to a different conclusion, based on the doctrinal argument that “[g]enerally, in the law of torts, the plaintiff’s conduct does not bar his recovery from a defendant who has been guilty of tortious conduct unless it is of the same general kind, or else of a more serious nature than that of the defendant.” Keeton, supra note 1, at 214. 62. See, e.g., Boston Housing Auth. v. Hemingway, 293 N.E.2d 831, 843 (Mass. 1973). 63. 685 S.W.2d 379 (Tex. Ct. App. 1984). 64. The Galaznik court adopted neither of our proposed reasons for reversing the jury verdict but instead found that the evidence of intent not to perform was insufficient, that the ex-husband could not have reasonably relied on the unenforceable promise, and generally emphasized that the ex-wife had been taken advantage of in the agreement. 65. EEOC Guidelines on Discrimination Because of Religion, 29 C.F.R. § 1605.3(b)(2) (2003). This is assuming, of course, that the employer is subject to these provisions of Title VII, that the job does not fall into one of the exception categories, and so forth. 66. For similar reasons, we think that the Massachusetts Supreme Court got it right when it held that a police department could not fire an employee for dishonestly answering in his employment application an illegal question about prior mental hospitalization. Kraft v.

Notes to Pages 160–62

Police Comm’r of Boston, 571 N.E.2d 380 (Mass. 1991). And along the same lines, we would expect the Americans with Disabilities Act to preempt any attempt to impose liability on a disabled applicant who misrepresented her intent to request accommodations and that the Family Medical Leave Act should preclude liability for an applicant’s misrepresentation of her intent to have children. 67. Defensive promissory misrepresentation, however, extends beyond the case of duress. Edith Hamilton summarizes Hercules’s visit with Atlas as follows: Atlas, who bore the vault of heaven upon his shoulders, was the father of Hesperides, so Hercules went to him and asked him to get the [Golden Apples of Hesperides] for him. He offered to take upon himself the burden of the sky while Atlas was away. Atlas, seeing a chance of being relieved forever from his heavy task, gladly agreed. He came back with the apples, but he did not give them to Hercules. He told Hercules he could keep on holding up the sky, for Atlas himself would take the apples to Eurystheus. On this occasion Hercules had only his wits to trust to. . . . He agreed to Atlas’ plan, but asked him to take the sky back for just a moment so that Hercules could put a pad on his shoulders to ease the pressure. Atlas did so, and Hercules picked up the apples and went off. Edith Hamilton, Mythology 233 (1942). Notice the structural similarity to our proposed reading of Alaska Packers’ Association v. Domenico immediately below. 68. 117 F. 99 (9th Cir. 1902). 69. Id. at 102. 70. The exception has traditionally been procreative agreements that are part of a marriage commitment, where promissory insincerity was often grounds for annulment or divorce. See generally T. C. Williams, Avoidance of Procreation of Children as Ground for Divorce or Annulment of Marriage, 4 A.L.R.2d 227 (1949). Such promises are apparently increasingly common in prenuptial agreements. See Jill Brooke, A Promise to Love, Honor and Bear No Children, N.Y. Times, Oct. 13, 2002, § 9, at 1. 71. See Jennifer Gerarda Brown, The “Sophie’s Choice” Paradox and the Discontinuous Self: Two Comments on Wertheimer, 74 Denv. U. L. Rev. 1255 (1997). 72. See Stephen D. Sencer, Note, Read My Lips: Examining the Legal Implications of Knowingly False Campaign Promises, 90 Mich. L. Rev. 428 (1991). Sencer takes the position that liability for insincere campaign promises would be a good thing and that the only problem is crafting a workable damages regime. To get to his conclusion, however, Sencer has to adopt a fairly extreme version of the mandate theory of representation, according to which elected representatives should serve only as conduits for the will of the people, rather than as trustees required to exercise their independent judgment. See Hanna F. Pitkin, The Concept of Representation 146 –47 (1967). Thus Sencer argues that if we could solve the damages problem, all campaign promises (whether sincere or not) should, if broken, give rise even to breach-of-contract liability. Sencer, at 445 –57. But Sencer doesn’t address the problem of the electorate’s changing will. There’s no clear mechanism for releasing a politician from a campaign promise if the will of the people changes. Consequently, even under the mandate theory, campaign promises may not be the best transmission mechanism, and liability, be it in contract or in tort, may not be appropriate.

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73. 130 N.M. 214 (2001). 74. See Henson v. Sorrell, 1999 WL 5630 (Tenn. Ct. App. 1999); Erwin L. D. v. Myla Jean L., 41 Ark. App. 16, 847 S.W.2d 45 (1993); Melanie G. McCulley, The Male Abortion: The Putative Father’s Right to Terminate His Interests in and Obligations to the Unborn Child, 7 J.L. & Pol’y 1, 55 (1998). 75. Another possibility in the context of political promises, which Sencer suggests, would be to limit the plaintiff ’s relief to a declaratory judgment that the candidate’s promise was insincere. Sencer, supra note 72, at 468. Since politicians are particularly sensitive to reputational sanctions, this might provide some desirable ex ante deterrence without unduly constraining the ex post choice. While we doubt that the judiciary, at least in this country, would feel comfortable reaching such judgments, this might be an appropriate action for an independent election commission. 76. Students Sue Yale, Wash. Post, Oct. 26, 1984, A24. 77. 212 So. 2d 906 (Fla. Dist. Ct. App. 1968). 78. Id. at 908. 79. Id. at 909 (quoting Ramel v. Chasebrook Constr. Co., 135 So. 2d 876 (Fla. Dist. Ct. App. 1961). 80. Peevyhouse v. Garland Coal & Mining Co., 382 P.2d 109 (Okla.), cert. denied. 375 U.S. 906 (1963). 81. See Judith L. Maute, Peevyhouse v. Garland Coal & Mining Co. Revisited: The Ballad of Willie and Lucille, 89 Nw. U. L. Rev. 1341, 1366 (1995). 82. Maute’s meticulous research was not able to substantiate the plaintiff’s claim—as the key contracting actor for the coal company had died long before. She concludes: “No concrete evidence of fraud satisfies the high burden of proving this judicially disfavored claim.” Id. In fact, this company employee testified at trial that “when [he] negotiated and obtained [the] lease form the Peevyhouses, . . . [he] intend[ed] to comply with the terms of the contract.” Id. at n. 70. 83. 413 N.E.2d 567 (Ind. 1980). 84. Id. at 570. 85. Id. at 571 (DeBruler, J., dissenting). 86. See also O’Gorman v. Haber, 147 A. 882 (R.I. 1929) (affirming a finding of promissory fraud based on the defendant’s repeated assurances that he would pay overdue rent, which caused the landlord to delay attaching the defendant’s goods). 87. Restatement (Second) of Contracts § 251 (1981); U.C.C. § 2–609(1) (1998). See generally Larry T. Garvin, Adequate Assurance of Performance: Of Risk, Duress, and Cognition, 69 U. Colo. L. Rev. 71, 129 – 40 (1998); R. J. Robertson Jr., The Right to Demand Adequate Assurance of Due Performance: Uniform Commercial Code 2– 609 and Restatement of Contracts § 251, 38 Drake L. Rev. 305 (1988 – 89); Thomas M. Campbell, Note, The Right to Assurance of Performance Under UCC § 2– 609 and Restatement (Second) of Contracts § 251: Toward a Uniform Rule of Contract Law, 50 Fordham L. Rev. 1292 (1982). 88. See U.C.C. § 2–609 cmt. 4 (1998) (discussing what constitutes “adequate” assurance). 89. This goes some distance toward answering Garvin’s concern that, in theory, the adequate-assurance doctrine is problematic insofar as it can be a tool for the forced modification of a contract. Garvin, supra note 87 at 129 –140. Garvin argues that even if the

Notes to Pages 167–72

promisor provides no additional security, her “unsupported promise that [she] will in fact perform goes beyond the bargain, in that the parties could have, but did not, arrange for periodic reassurances.” Id. at 130. On our model, the promisor need not even provide a new promise (which is problematic presumably because she might thereby incur additional contractual liability). All that is required is that, having once shared information about her intent to perform, she continue to update that information. As for Garvin’s point that the parties could have explicitly contracted for this, it bears keeping in mind that the adequate-assurance rule is likely a default that the parties can contract out of. Courts would probably enforce a contractual term like: “While A now intends to perform, A shall have no obligation—regardless of B’s future reasonable uncertainty as to A’s performance—to inform B should her intention change.” CHAPTER 8: FALSE PROMISE

1. 18 U.S.C. §§ 1341, 1343; see also Model Penal Code § 223.3 (1980) (“A person is guilty of theft if he purposely obtains property of another by deception. A person deceives if he purposely . . . creates or reinforces a false impression, including false impressions as to . . . intention or other state of mind; but deception as to a person’s intention to perform a promise shall not be inferred from the fact alone that he did not subsequently perform the promise.”). 2. See, e.g., Robert Cooter & Thomas Ulen, Law and Economics 432– 35 (3d ed. 2000); Gary S. Becker, Crime and Punishment: An Economic Approach, in Foundations of the Economic Approach to Law, at 125, 131–32 (Avery W. Katz, ed., 1998); Jean Hampton, “A New Theory of Retribution,” in Liability and Responsibility: Essays in Law and Morals 377 (R. Frey & C. Morris eds. 1991); Hampton, “Correcting Harms Versus Righting Wrongs: The Goal of Retribution,” 39 U.C.L.A. L. Rev. 1659 (1992); Richard A. Posner, Economic Analysis of Law 163– 64 (2d ed. 1977). 3. Cf. Bruce Chapman & Michael Trebilcock, Punitive Damages: Divergence in Search of a Rationale, 40 Ala. L. Rev. 741, 804 – 05 (1989). 4. N.Y. Penal Law § 155.05(2)(d) (McKinney 1999). 5. Our overview of criminalization draws heavily on Pearce’s comprehensive account of the early history of the crime. Arthur Pearce, Theft by False Promises, 101 U. Pa. L. Rev. 967 (1953). See also Elliot D. Pearl, Note, Criminal Law: False Promise as False Pretenses, 43 Cal. L. Rev. 719 (1955); Note, The Case for a Law of Promissory Fraud, 53 Colum. L. Rev. 407, 407– 9 (1953). 6. 30 Geo. II, ch. 24 (1757) (Eng.). 7. Russ. & R.C.C. 461 (1821). 8. Id. at 463. 9. 36 Mass. 179 (1837). 10. Id. at 185. 11. See Pearce, supra note 5, at 968 –78 (1953); People v. Ashley, 267 P.2d 271, 280 (Cal. 1954). In particular, both Wharton and the Goodhall court failed to consider Young v. The King, 3 T.R. 98, 100 Eng. Rep. 475 (K.B. 1789), which held that a misrepresentation as to future conduct could be the basis for a conviction for false pretense.

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12. Wharton, American Criminal Law 542 (1st ed., 1846). 13. Pearce, supra note 5, at 977. 14. 17 Stat. 283, 323 (1872). The “scheme or artifice to defraud” language has since disappeared from the federal mail-fraud statute. 18 U.S.C. § 1341. But it remains in a number of other federal antifraud provisions. 7 U.S.C. § 60 (Fraud and misrepresentation by commodity-trading advisers, commodity-pool operators, and associated persons) (enacted Sept. 21, 1922); 15 U.S.C. §§ 77q (Fraudulent interstate transactions) (enacted May 27, 1933), 78jjj (Securities investor protection; prohibited acts; concealment of assets; false statements or claims) (Pub. L. No. 91–598, Dec. 30, 1970), 80b-6 (Prohibited transactions by investment advisers) (enacted Aug. 22, 1940), 1703 (Requirements respecting sale or lease of lots) (Pub. L. No. 90 –448, Aug. 1, 1968); 18 U.S.C. §§ 157 (Bankruptcy fraud) (Pub. L. No. 103 –394, Oct. 22, 1994), 514 (Fictitious obligations) (Pub. L. No. 104 –208, Nov. 30, 1996), 2314 (Transportation of stolen goods, securities, moneys, fraudulent State Tax stamps, or articles used in counterfeiting) (enacted June 25, 1948). 15. 161 U.S. 306 (1896). 16. Id. at 313. 17. Id. (“The statute is broader than is claimed. Its letter shows this: ‘Any scheme or artifice to defraud.’ Some schemes may be promoted through mere representations and promises as to the future, yet are nonetheless schemes or artifices to defraud.”). 18. Id. The court also cited Evans v. United States, 153 U.S. 584 (1894), in which the U.S. Supreme Court affirmed defendant’s criminal conviction for an insincere promise. Id. Pearce notes that the Evans decision was based on a faulty assertion that there existed state statutes criminalizing some forms of false promise. See Pearce, supra note 5, at 980 n. 55. 19. 35 Stat. 1130 (1909), as amended, 18 U.S.C. § 1341 (2000). See Pearce, supra note 5, at 1011, n. 56. See also 18 U.S.C. §§ 157 (Bankruptcy fraud) (Pub. L. No. 103 –394, Oct. 22, 1994), 981 (Civil forfeiture) (Pub. L. No. 99 –570, Oct. 27, 1986), 982 (Criminal forfeiture) (Pub. L. No. 99 – 570, Oct. 27, 1986), 1031 (Major fraud against the United States) (Pub. L. No. 100 –700, Nov. 19, 1988), 1343 (Fraud by fire, radio, or television) (enacted July 16, 1952), 1344 (Bank fraud) (Pub. L. No. 98 –473, Oct. 12, 1984), 1347 (Health-care fraud) (Pub. L. No. 104 –191, Aug. 21, 1996), 1348 (Securities fraud) (Pub. L. No. 107–204, July 30, 2002), 2314 (Transportation of stolen goods, securities, moneys, fraudulent State Tax stamps, or articles used in counterfeiting) (enacted June 25, 1948). 20. Cf. United States v. Grayson, 166 F.2d 863, 866 (2d Cir. 1948) (citing Durland in support of proposition that false promises may constitute a fraud); People v. Ashley, 267 P.2d 271, 281 n. 3 (Cal. 1954) (citing Durland to claim that U.S. Supreme Court rejected majority rule). 21. State v. McMahon, 140 A. 359, 360 (R.I. 1928) (“This state is committed to the doctrine that in an action for deceit, intention not to meet a future obligation is a question of fact to be submitted to the jury, and that misrepresentation of a present state of mind as to such intention is a false representation of an existing fact. The rule is equally applicable in this criminal prosecution for cheating.” [citations omitted]). Indeed, Rhode Island arguably always criminalized false promise, since no case ever held to the contrary. See Pearce, supra note 5, at 980 – 81.

Notes to Pages 173–74

22. See Commonwealth v. Walker, 108 Mass. 309, 312 (Mass. 1871); Commonwealth v. Althause, 93 N.E. 202, 206 (Mass. 1910) (quoting Edgington v. Fitzmaurice); Commonwealth v. Morrison, 147 N.E. 588, 590 (1925); Commonwealth v. McKnight, 195 N.E. 499, 506 (Mass. 1935). In fact, from 1910 on, no Massachusetts court reversed a falsepromise conviction under the false-pretense statute. Pearce, supra note 5, at 983. 23. Commonwealth v. Green, 94 N.E.2d 260, 264 (Mass. 1950) (“[T]he representations that the moneys contributed were to be invested in this fund were statements of fact as to the intention of those collecting for the fund.”). 24. 157 F.2d 697, 699 –701 (D.C. Cir. 1946). 25. 267 P.2d 271, 275 – 88 (Cal. 1954), cited with approval in State v. Moore, 273 S.E.2d 821, 825 (W.Va. 1980), Craver v. State, 942 P.2d 1110, 1113 (Wyo. 1997), State v. Hogrefe, 557 N.W.2d 871, 877 (Iowa 1996). 26. See State v. Healy, 102 N.E.2d 233, 244 (Ohio 1951); People v. Robinson 290 P. 470, 475 (Cal. App. 1930); 52B C.J.S. Larceny § 39 (2003); Note, The Case for a Law, supra note 5, at 407. 27. 62 N.E. 418 (N.Y. 1902). 28. 72 N.Y.S. 253, 259 (N.Y. App. Div. 1901). 29. 63 N.E. at 423. 30. Pearce, supra note 5, at 995. 31. People v. Karp, 81 N.E.2d 817 (N.Y. 1948). 32. N.Y. Penal Law § 155.05(2)(d) (McKinney 1999). We find a similar development in Texas. For a number of years Texas judges muddled along, recategorizing in some cases and not in others. See, e.g., Anderson v. State, 177 S.W. 85 (Tex. Crim. App. 1915) (recategorizing offense as “theft by fraudulent pretext” to hold promissory fraud sufficient to sustain conviction); Johnson v. State, 162 S.W.2d 980 (Tex. Crim. App. 1942) (citing cases that note the blurred distinction between “swindling” and “theft by false pretext,” the latter offense provable through false promises); Hilliard v. State, 401 S.W.2d 814 (Tex. Crim. App. 1966). This continued until the inconsistency was rectified in 1973 by legislation that expressly criminalized false promise. Tex. Penal Code Ann. § 31.01(1)(E) (Vernon 1994). 33. There were some earlier specialized statutes. As we discuss below, a number of Southern states had laws on the books dating back to Reconstruction that criminalized the acceptance of a wage advance with the intention not to complete the term of employment— laws that were used to perpetuate the servitude of African Americans. In 1939 the Maryland legislature addressed the converse situation, stipulating that “[e]very person who with intent to cheat and defraud another, shall obtain services from such other on a promise of payment of wages therefor, and shall fail to pay for such services when payment is due and demanded shall be guilty of a misdemeanor.” 1939 Md. Laws 384; see also Note, False Pretenses—Obtaining Services by Fraudulent Promise of Compensation Made a Misdemeanor, 53 Harv. L. Rev. 893 (1940). 34. La. Rev. Stat. Ann. § 14:67 (West 1942). 35. State v. Hardy, 376 So. 2d 131, 132 (La. 1979) (quoting the statute’s reporter comment). 36. State v. Dabbs, 66 So. 2d 323 (La. 1955). See also Herve Racivitch Jr., Comment, False Statements of Intention as an Element of Fraud in Criminal Law, 21 Tul. L. Rev. 639, 646 –

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48 (1946–1947) (recommending the interpretation of the Louisiana statute adopted by the Dabbs court). Ohio followed a few years later. Much as with the 1942 New York amendment, in 1943, the Ohio legislature revised the larceny statute so that one could be charged with larceny if he or she used a misrepresentation to obtain either possession only or both possession and title. But in stark contrast to the New York Court of Appeals’ ruling in People v. Karp, the Ohio Supreme Court deemed the consolidated statute to criminalize acquisition of title by false promises, noting the federal mail-fraud statute as precedent and inferring that the legislature specifically intended to close this loophole left by strict adherence to traditional doctrine. State v. Singleton, 87 N.E.2d 358 (Ohio Ct. App. 1949). 37. 29 N.W.2d 458 (Neb. 1947). For a discussion of the role Hameyer played in the legislature’s actions, see Pearce, supra note 5, at 982– 83. 38. 1947 Neb. Laws c. 99. The statute was again amended in 1977 with the adoption of a theft-by-deception statute patterned after the ALI Model Penal Code. Neb. Rev. Stat. § 28-512 (1995). 39. For example, New Jersey passed a statute expressly including false promise in 1952. N.J. Stat. Ann. 2A:111-1 (repealed 1978). 40. Model Penal Code § 223.3 (1980). 41. 18 Pa. Cons. Stat. § 3922 (1983). 42. See Ken. Rev. Stat. 514.040 (1974); N.J. Stat. Ann. 2C:20-4 (1979); So. Dak. Codified Laws 22-30A-3 (1976). 43. Iowa Code § 702.9(5) (1976, effective 1/1/1978). 44. State v. Hogrefe, 557 N.W.2d 871, 877 (Iowa 1996) (The legislature “followed the lead of the [Model Penal Code (1980)] in its definition of theft by deception.”). 45. For example, legislatures in the following states criminalized false promise in the years indicated: New York, 1965, see N.Y. Penal Law § 155.05(2)(d) (McKinney 1999); Connecticut, 1971, see Conn. Gen. Stat. Ann. § 53a-119(3); Pennsylvania, 1972, see 18 Pa. Cons. Stat. § 3922 (1983); Texas, 1973, see Tex. Penal Code Ann. § 31.01(1)(E) (Vernon 1994); North Carolina, 1975, see N.C. Gen. Stat. § 14-100 (2001); Iowa, 1978, see Iowa Code § 702.9; Arizona, 1978, see A.R.S. §§ 13-1801(3) and 13-1802; West Virginia, 1980, § 61-3-24; Alabama, 1980, Ala. Code 1975 § 13A-8-2. 46. Alaska Stat. § 11.46.180 (Michie 2002); Ala. Code § 13A-8-2 (2002); Ark. Code Ann. § 5-36-101(3) (Michie 2002); Ariz. Rev. Stat. § 13-1801(3) (2002); Cal. Penal Code § 484 (West 1999) (false-pretense statute construed by state courts to include false promises); Colo. Rev. Stat. Ann. 18-4-401(1) (West 2002); Conn. Gen. Stat. Ann. § 53a-119(3) (West 2003); Del. Code Ann. tit. 11, § 844 (2002); D.C. Code Ann. § 22-3221(c) (2002); Fla. Stat. Ann. § 817.034(3)(d) (West 2002) (criminalizing false promises made though mail, wire, or other communications technology); Ga. Code Ann. § 16-8-3(b)(5) (1999); Haw. Rev. Stat. § 708-800 (2002); Idaho Code § 18-2403(2)(d) (2002); 720 Ill. Comp. Stat. 5/ 15-4 (2002); Ind. Code § 35-43-4-1(b)(6) (2002); Iowa Code Ann. § 702.9(5) (West 2002); Ky. Rev. Stat. Ann. § 514.040 (Banks-Baldwin 2002); La. Rev. Stat. Ann. § 14:67 (West 2002); Me. Rev. Stat. Ann. tit. 17-a, § 354 (West 2003); Md. Code Ann. Crim. Law § 7-101 (2002); Mass. Gen. L. ch. 266, § 30 (2002) (false-pretense statute construed by state courts to include false promises); Minn. Stat. § 609.52(2)(3) (2002); Miss. Code

Notes to Pages 175–76

Ann. § 97-19-83 (2003) (criminalizing false promises made though mail, wire, or other communications technology); Mo. Ann. Stat. § 570.010 (West 2002); Mont. Code Ann. § 45-2-101(17)(e) (2002); Neb. Rev. Stat. § 28-512 (2002); Nev. Rev. Stat. § 205.0832(1)(c) (2003); N.H. Rev. Stat. Ann. § 637:4 (2002); N.J. Rev. Stat. § 2C:204 (2002); N.M. Stat. Ann. § 30-16-6 (2003); N.Y. Penal Law § 155.05(2)(d) (McKinney 1999); N.C. Gen. Stat. § 14-100a (2001); N.D. Cent. Code § 12.1-23-10 (1997); Ohio Rev. Code. Ann. § 2913.01(a) (Anderson 2002); Or. Rev. Stat. § 164.085 (2001); 18 Pa. Cons. Stat. Ann. § 3922 (West 1998); R.I. Gen. Laws s 11-41-4 (2002) (false-pretense statute construed by state courts to include false promises); S.D. Codified Laws § 22-30A-3 (Michie 2002); Tenn. Code Ann. § 39-11-106(a)(6)(A)(vi) (2003); Tex. Penal Code Ann. § 31.01(1)(E) (Vernon 2003); Utah Code Ann. § 76-6-401(5)(e) (1999); Vt. Sta. Ann. tit. 13, § 2002 (2003) (false-pretense statute construed by state courts to include false promises); Wash. Rev. Code Ann. § 9A.56.010(5)(e) (West 2002); W.Va. Code § 61-3-24 (Michie 2000)) (false-pretense statute construed by state courts to include false promises); Wis. Stat. Ann. § 943.20 (West 2002). 47. D.C. Code Ann. § 22-3211(c) (2003) (retail sales); Iowa Code § 714.1(3) (Michie 1997) (same); Conn. Gen. Stat. Ann. § 53a-119(9) (West 1999) (same); 815 Ill. Comp. Stat. Ann. 515/3(a)(2) (West 1993) (home repair); Miss. Code Ann. § 97-23-103 (2004) (same). 48. Michigan, South Carolina, and Virginia maintain false-pretense statutes that their courts interpret as not including theft by false promise. See M.C.L.A. § 750.218; People v. Reigle, 566 N.W.2d 21, 38 (Mich. App. 1997); S.C. Code Ann. § 16-13-240 (Law. Coop 2003); State v. McCutcheon, 327 S.E.2d 372 (S.C. Ct. App. 1985); Va. Code Ann. § 18.2-178 (Mich. 1996); Grites v. Commonwealth, 384 S.E.2d 328 (Va. Ct. App. 1989). 49. 157 F.2d 697 (D.C. Cir. 1946). 50. 267 P.2d 271 (Cal. 1954). See also Note, The Case for a Law, supra note 5, 411–15; René August Pastorek, Note, Obtaining by False Promise: A Proposed Statute, 5 U. Fla. L. Rev. 63 (1952); W. David Curtis, A State of Mind: Fact or Fancy, 33 Cornell L.Q. 351 (1947–1948); Racivitch, supra note 36. The debate was going on at the same time in England and other common-law countries, spurred mainly by R. v. Dent, [1955] Crim. L.R. 501 (Eng.). See A. E. Jones, The Intention to Avoid Paying a Railway Fare, 1958 Crim. L. Rev. 31; A. Ll. Armitage, Comment, Criminal Law—False Pretenses—Statements of Intention, 1956 Cambridge L.J. 3 (1956); Note, Obtaining by False Pretenses, 71 Law Q. Rev. 477 (1955); E. M. Burchell, Note, False Pretenses, 72 S. African L. J. 412 (1955); L. Craymer, Intention: Is It an Existing Fact? 1955 Crim. L. Rev. 556. 51. Id. at 698. 52. This is not to say that doctrinal arguments played no role. Both the Chaplin majority and especially Schauer’s Ashley concurrence recurred to the familiar line of civil and criminal decisions that rejected the idea of fraud liability for promissory acts, as well as to the 1932 version of Wharton’s Criminal Law, which held on to the old rule that “a statement of intention is not a statement of an existing fact” such as is required to support a conviction for false pretenses. Chaplin, 157 F.2d at 698 (quoting Wharton’s Criminal Law § 1439 [12th ed. 1932]); Ashley, 267 P.2d at 282–23 (Schauer, J., concurring) (listing cases). Edgerton’s Chaplin dissent, on the other hand, adopted the now common position that

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every promise represents an intention to perform—what we have called the “categorical interpretation”: “No doubt a promise is commonly an undertaking, but it is always an assertion of a present intention to perform. ‘I will’ means among other things ‘I intend to.’ It is so understood and it is meant to be so understood. Intention is a fact and present intention is a present fact. A promise made without an intention to perform is therefore a false statement about a present fact.” 157 F.2d at 700 (Edgerton, J., dissenting). 53. Id. at 699 (quoting Rex v. Goodhall, [1821] Russ. & R.C.C. 461). 54. 157 F.2d at 700 (Edgerton, J., dissenting). 55. Jonathan Swift, Gulliver’s Travels 48 – 49 (Arthur Case ed., The Ronald Press Co. 1938) (1726). To Swift’s point about the costs of monitoring for deceit can be added the empirical observation that most people overestimate their ability to detect fraud and are thus easy marks. See Arthur A. Leff, Swindling and Selling 84 –87 (1976). 56. 267 P.2d at 289 (Schauer, J., concurring). 57. Id. at 290. See also Chaplin, 157 F.2d at 699 (“The risk of prosecuting one who is guilty of nothing more than a failure or inability to pay his debts is a very real consideration.”). 58. Chaplin, 157 F.2d at 699. 59. 157 F.2d at 701 (Edgerton, J., dissenting). 60. 267 P.2d at 283. 61. Id. at 282. 62. Id. at 283. 63. 922 P.2d 15 (Utah Ct. App. 1996). 64. 593 N.E.2d 208 (Ind. Ct. App. 1992). 65. 178 Cal. App. 2d 33 (Cal. Ct. App. 1960). 66. 400 N.Y.S.2d 385 (N.Y. App. Div. 1977). 67. See generally David Firestone & Robert D. McFadden, Scores of Bodies Strewn at Site of Crematory, N.Y. Times, Feb 17, 2002, at A1; Pam Belluck & Greg Winter, Crematory Case Underlines Gaps in Oversight over Funeral Business, N.Y. Times, Feb. 23, 2002, at A1. 68. See, e.g., N.J. Stat. Ann. 2C:20 –4 (West 1995); N.Y. Penal Law § 155.05(2)(d) (McKinney 1998); Tex. Penal Code Ann. § 31.01(1)(E) (Vernon 2003); 720 Ill. Comp. Stat. Ann. 5/ 15 – 4 (West 1993); Del. Code Ann. tit. 11 § 844 (2001). 69. We are not the first to make this suggestion. In an anonymous 1953 note in the Columbia Law Review we find the following: “A promissory fraud statute, however, can be less extensive in its coverage. Its proper targets are plainly dishonest businessmen and swindlers cautious enough to avoid violation of existing false pretense and larceny laws. In accordance with this objective the crime should depend on proof of a positive and almost unconditional intent not to perform, rather than proof merely of a lack of a reasonable belief that he, the defendant, would perform. This leaves immune from prosecution the promisor who, unknown to the promisee, intends to perform only if certain events which will probably not occur do occur.” Note, The Case for a Law of Promissory Fraud, 53 Colum. L. Rev. 407, 413 (1953) (footnote omitted). But so far as we know, neither courts nor legislatures have expressly taken up the distinction. 70. See supra chapter 6 pp. 119 – 26. 71. D.C. Code Ann. § 22– 3211 (2003).

Notes to Pages 183–86

72. 432 S.E.2d 636 (Ga. Ct. App. 1993). 73. See also Cash v. United States, 700 A.2d 1208 (D.C. Ct. App. 1997) (after promising home improvements and receiving down payment, defendant prepared to perform by bringing jackhammer to the house but did not use it for more than two months); Estano v. State, 595 So. 2d 973 (Fl. Ct. App. 1992) (reversing a conviction for false promise because the trial court had not admitted evidence that the defendant had performed similar promises made two weeks earlier). 74. 556 N.E.2d 936 (Ind. Ct. App. 1990). 75. Id. at 940. 76. Id. at 944 (Miller, J., dissenting). 77. As it happens, while Kollar may have had a bad business model, it seems that the demise of his business was precipitated not by the collapse of his pyramid scheme but by the theft of $212,000 worth of coins from his store and then, eight months later, the receipt of several bad checks at a coin show. Id. at 938. Had this been a civil case, the defendants might have had difficulty proving proximate cause. 78. Id. at 944 (Miller, J., dissenting). 79. N.Y. Penal Law § 155.05(2)(d) (McKinney 1999). See also Idaho Code § 18-2403(2)(d)(2) (Michie 1997). 80. See, e.g., Yick Wo v. Hopkins, 118 U.S. 356 (1886); Washington v. Davis, 426 U.S. 229 (1976); McCleskey v. Kemp, 481 U.S. 279 (1987). See also Peggy Cooper Davis, The Proverbial Woman, 48 Rec. Ass’n B. City N.Y. 7, 20 (1993); Michael J. Klarman, The Racial Origins of Modern Criminal Procedure, 99 Mich. L. Rev. 48 (2000); Reva B. Siegel, The Rule of Love: Wife Beating as Prerogative and Privacy, 105 Yale L.J. 2117, 2120 (1996). 81. Lea S. VanderVelde, The Gendered Origins of the Lumley Doctrine: Binding Men’s Consciences and Women’s Fidelity, 101 Yale L.J. 775, 776 –77 (1992). 82. Jennifer Roback, Southern Labor Law in the Jim Crow Era: Exploitative or Competitive? 51 U. Chi. L. Rev. 1161, 1166–68 (1984), reprinted in Labor Law and the Employment Market 217 (Richard A. Epstein & Jeffrey Paul eds., 1985). See also Taylor v. Georgia, 315 U.S. 25 (1942) (applying Bailey to hold a Georgia false-promise labor statute unconstitutional); Pollock v. Williams, 322 U.S. 4 (1944) (applying Bailey to hold a Florida falsepromise labor statute unconstitutional). 83. Roback, supra note 82, at 1168 (footnotes omitted). 84. Simeon Djankov et al., Courts: The Lex Mundi Project (Nat’l Bureau of Econ. Research, Working Paper No. 9980, 2002) (analyzing the legal procedures required in civil dispute to collect a bounced check in 109 different countries) available at http://www.nber.org/ papers/w8890. 85. See generally W. L. Heyman, Reasonable Expectation of Payment as Affecting Offense Under “Worthless Check” Statutes, 9 A.L.R.3d 719 (1966); Richard P. Good, Check Deception: Survey of Recent Law, 12 Ind. L. Rev. 141 (1979). 86. N.Y. Penal Law §§ 190.05, 190.10, 155.05(2)(c). 87. “Bad-check” or “worthless-check” offenses are distinct from “check-kiting” schemes. The point of check kiting is to trick banks into covering checks. Kiters are typically writing checks to themselves, often from other people’s accounts. People issuing bad checks

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Notes to Pages 186–89

with the intent to defraud, on the contrary, expect the bank not to pay. Thus the defendants are writing checks to others, generally from their own account, in exchange for the property or services. Indeed in People v. Halloran, 501 N.Y.S.2d 985 (N.Y. Sup. Ct. 1986), the defendants involved in a check-kiting scheme moved for dismissal of a “bad-check” indictment, arguing that they had not only intended but had worked hard to ensure that each check they wrote would be covered by the bank—the whole point of check kiting. (The appellate court found on other grounds that there was nonetheless sufficient evidence of false pretense to support the conviction. Id. at 909.) 88. 617 So.2d 1334 (La. Ct. App. 1993). 89. Id. at 1336. 90. 394 N.W.2d 643 (Neb. 1986). 91. Id. at 646. 92. Id. (emphasis added). This point was recognized in the seminal case of Commonwealth v. Drew, 36 Mass. 19 Pick. 179 (1837). There the court held: “The representation is inferred from the act, and the pretence may be made by implication as well as by verbal declaration. In the case at bar the defendant presented his own checks on a bank with which he had an account. What did this imply? Not necessarily that he had funds there. Overdrafts are too frequent to be classed with false pretences. A check, like an order on an individual, is a mere request to pay. And the most that can be inferred from passing it is, that it will be paid when presented, or in other words, that the drawer has in the hands of the drawee either funds or credit.” Id. at 186. The court continued beyond this, however, and also invoked the holding of Goodhall. That dicta was the basis of Wharton’s citation to Drew for the rule that false promises cannot be the basis of criminal liability. Pearce, supra note 5, at 974 –75. See also People v. Griffith, 262 P.2d 355 (Cal. 1953); State v. Lord, 79 N.W. 968 (Minn. 1899). But see Nguyen v. State, 14 P.2d 515 (Nev. 2000) (Defendant’s claim that he lacked intent to defraud in writing casino marker without sufficient funds associated with bank account was rejected; the defendant argued casinos generally have a policy of not drawing on the accounts until thirty days after the marker is issued, but the court found no mutual understanding that this marker would not be immediately drawn upon.). 93. See generally John D. Perovich, Application of “Bad Check” Statute with Respect to Postdated Checks, 52 A.L.R.3d 464 (1974); see also, e.g., Ariz. Rev. Stat. § 13-807(B)(2) (2002); Md. Ann. Code Crim. Law 8-102(a) (2002); Minn. Stat. § 609.535(5) (2002). 94. See, e.g., Martin v. Commonwealth, 821 S.W.2d 95 (Ky. Ct. App. 1991). 95. 672 A.2d 1261 (N.J. Super. Ct. App. Div. 1996). 96. The Kelm court dealt with the difference that postdating makes by disallowing the evidentiary presumption (which we discuss below) that nonpayment indicates an intent to defraud. Id. at 1263. That is, it held that if a check is postdated, the prosecution has to prove an intent to defraud from something other than the bouncing of the check itself, such as the evidence of the closed account. This is the approach most courts take. See also State v. Papillon, 389 N.W.2d 553, 554 (Neb. 1986) (“While there appears to be a split of authority in the United States regarding whether a postdated check can constitute a violation of a statute such as [this one], the majority and better reasoned cases appear to take

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Notes to Pages 189–90

97. 98. 99. 100. 101.

102.

103. 104.

the position that a postdated check cannot constitute a violation of a statute which requires an intent to defraud at the time the check is issued.”). We criticize the evidentiary presumption below. For the moment, we simply observe that as an analytic matter, this doesn’t get at why postdating matters (what it says) and conflates the veracity question—intent to prevent negotiability—with the scienter one—intent to defraud. As a practical matter, however, it generally seems to lead courts to the correct outcome, and it at least recognizes that postdating makes a difference. 640 A.2d 230 (Md. 1994). See, e.g., United States v. Aguilar, 967 F.2d 111, 115 (5th Cir. 1992). Mich. Comp. Laws Ann. § 750.131a(2) (West 2001). Jones v. State, 59 S.W.2d 418 (Tex. Crim. App. 1933). Ark. Code Ann. § 5-37-30r (a)(2(A)(ii)) (2002). See also Ala. Code § 13A-9-13.1(b)(2) (2002); Ariz. Rev. Stat. Ann. § 13-1808(A)(2) (2002); Colo. Rev. Stat. §§ 18-5-205(8)(b); 18-5-512(4)(b) (2002); Conn. Gen. Stat. § 53a-128(b)(2) (2002); Del. Code Ann. tit. 11, § 900(a)(2) (2002); D.C. Code Ann. § 22-1510 (2002); Fla. Stat. Ann. § 832.05(7) (2002); Haw. Rev. Stat. § 708-857(2)(a) (2002); Idaho Code § 18-3106(d) (2002); Ind. Code § 35-43-5-5(c) (2002); Iowa Code § 714.1(6) (2002); Kan. Stat. Ann. § 21-3707(2) (2002); Ky. Rev. Stat. Ann. § 514.040(4)(b) (Baldwin 2002); La. Rev. Stat. Ann. § 14:71(A)(2) (West 2002); Me. Rev. Stat. Ann. tit. 17-a, § 708(2)(B) (West 2003); Md. Ann. Code art. 27, § 142(b)(2) (2002); Mass. Gen. L. ch. 266, § 37 (2002); Minn. Stat. § 609.535(3) (2002); Mont. Code Ann. § 45-6-316(2) (2002); N.J. Rev. Stat. § 2C:21-5(b) (2002); N.Y. Penal Law § 190.10 (McKinney 1999); N.C. Gen. Stat. § 14-106 (2002); S.D. Codified Laws Ann. § 22-41-2 (2002). But see People v. Griffith, 262 P.2d 355 (Cal. 1953) (holding that the intent to defraud is an essential element of the offense and no presumption of law will suffice to prove that intent); People v. Beaudoin, 151 N.W.2d 868 (Mich. 1967) (requiring separate evidence of intent to defraud); Lovelace v. State, 2 So.2d 796 (Miss. 1941) (holding insufficient evidence of intent to defraud). State v. Rogers, 485 S.E.2d 619, 620 (N.C. 1997) (emphasis added). Some jurisdictions have separated the knowledge and intent elements, holding that while the knowledge can be presumed, the state still has to prove intent to defraud beyond a reasonable doubt. Thus in State v. Robinson, 602 N.W.2d 730 (S.D. 1999), the court overturned a bad-check conviction because the jury instructions gave the impression that, once the predicate act was proven beyond a reasonable doubt (that is, that the defendant passed a check and that it bounced), the burden shifted to the defendant to prove that he had no knowledge that there were insufficient funds. The court found that the prosecution must not only prove beyond a reasonable doubt that the passer knew at the time that there were not sufficient funds in the account to allow for full payment of the check, but also prove that the defendant intended to defraud the person to whom the check was delivered. See also South Dakota Pattern Jury Instruction, 3-12-5. 557 N.W.2d 871, 877–78 (Iowa 1996). Id. at 878 (“The theft by check statute establishes a clear scheme for dealing with a common means of theft (bad checks) with potentially difficult questions of proof.”).

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105. It’s worth noting that our criticism here is based on prudential, not constitutional considerations. In State v. Lindsey, for example, the court held that Louisiana’s presumption was a permissive not mandatory one and therefore did not violate the Due Process Clause. 490 So. 2d 371 (La. 1986). See also State v. Robinson, 602 N.W.2d 730, 734 (S.D. 1999) (reversing a conviction for passing a bad check where the trial court “failed to tell the jury that it was not required to take the prima facie evidence as proof of knowledge”). 106. 807 So. 2d 132 (Fla. Dist. Ct. App. 2002). 107. 509 S.E.2d 87 (Ga. 1999). 108. Jane E. Larson, “Women Understand So Little, They Call My Good Nature ‘Deceit’”: A Feminist Rethinking of Seduction, 93 Colum. L. Rev. 374, 383 (1993); Linda Hirshman & Jane Larson, Hard Bargains: The Politics of Sex 128 (1998). 109. State v. Moss, 209 N.W. 276, 277 (Iowa 1926). 110. 129 S.W. 530, 531 (Ark. 1910). 111. 23 S.W. 1080, 1081 (Mo. 1893) (emphasis added). 112. 90 S.W. 151, 152 (Ark. 1905). Similarly, in McCullar v. State, 36 S.W. 585 (Crim. Ct. App. Texas 1896), the court simply omitted insincerity from its description of the crime: “[The jury] must believe that the defendant did promise to marry the prosecutrix, and that, by reason of such promise, she was induced to yield her virtue to him. . . . The offense consists in enticing a woman from the path of virtue, and obtaining her consent to illicit intercourse by promise made at the time. The promise and yielding her virtue in consequence thereof is the gist of the offense.” 113. 27 Conn. 319, 323 (1858). 114. Id. at 323 –24. 115. Combs v. Commonwealth., 283 S.W.2d 714, 715 (Ky. Ct. App. 1955). See also Merrell v. State, 57 S.W. 289 (Ct. Crim. App. Tex. 1900). 116. 24 So. 43 (Ala. 1898). 117. See, e.g., N.J. Rev. Stat. § 2A:142–2 (repealed 1979); N.C. Gen. Stat. § 14–180 (repealed 1975); Iowa Code Ann. § 200.2 (repealed 1978); Mo. Ann. Stat. § 559.310 (repealed 1979). CHAPTER 9: TEACHING PROMISSORY FRAUD

1. See supra chapter 1 note 23. 2. Deborah L. Rhode & David Luban, Legal Ethics (3d ed. 2001). 3. John H. Barton & Bart S. Fisher, International Trade and Investment: Regulating International Business (1986). 4. 382 P.2d 109 (Okla.), cert. den., 375 U.S. 906 (1963). 5. 133 N.W.2d 267 (Wis. 1965). 6. 18 Q.B. 256 (1893). 7. 117 F. 99 (9th Cir. 1902). 8. 212 So. 2d 906 (Fla. Dist. Ct. App. 1968). 9. 29 Ch. D. 459, 483 (Ch. App. 1885). 10. Restatement (Second) of Torts § 530, cmt. c. 11. Restatement (Second) of Contracts § 171(2) (1981).

Notes to Pages 195–200

12. 219 U.S. 219 (1911). This case is already included in Randy Barnett’s Contracts: Cases and Doctrine, 224 (2003). Bailey did not put an end to the use in the South of false-promise statutes to enforce otherwise unenforceable labor contracts. Thus the court twice again revisited the issue, affirming and expanding Bailey’s holding. Taylor v. Georgia, 315 U.S. 25 (1942); Pollock v. Williams, 322 U.S. 4 (1944). There are a number of other Supreme Court cases that touch on the issues of promissory fraud and false promise. Fifteen years before Edgington, the court affirmed the dismissal of allegations of fraud based largely on unfulfilled promises made by the seller of stock in a railroad, on the principle that “[a] promissory statement is not, ordinarily, the subject of an indictment or of an action.” Sawyer v. Pickett, 86 U.S. 146, 160 (1873). Three years later, however (and still prior to Edgington), the court held that “a party not intending to pay, who . . . induces the owner to sell him goods on credit by fraudulently concealing his insolvency and his intent not to pay for them, is guilty of a fraud.” Donaldson v. Farwell, 93 U.S. 631 (1876). Eight years after Edgington, the court held that insincere promising could be prosecuted under the federal mail-fraud statute. Durland v. United States, 161 U.S. 306 (1896). In 1927, the court ruled that the civil action for promissory fraud did not violate due process, even where breach shifted the burden to defendant to show no misrepresentation. James-Dickinson Farm Mortgage Co. v. Harry, 273 U.S. 119 (1927). And in 2001 the court considered a classic promissory-fraud claim brought under section 10(b) of the of the Securities Exchange Act of 1934. Wharf (Holdings) Ltd. v. Int’l Holdings, Inc., 532 U.S. 588 (2001). See also Illinois, ex rel. Madigan v. Telemarketing Assoc., Inc. 538 U.S. 600 (2003) (holding that the First Amendment does not bar fraud claims against charitable fundraisers based on the fundraisers’ representations concerning the share of funds that would actually go to charity). For other Holmes opinions, see Commonwealth v. Rubin, 43 N.E. 200 (Mass. 1896); Sweet v. Kimball, 166 Mass. 332 (1896). 13. Bailey, 219 U.S. at 228. 14. Id. 15. Id. at 247– 48 (Holmes, J., dissenting) (citations omitted). 16. Id. at 249. 17. See Jennifer Roback, Southern Labor Law in the Jim Crow Era: Exploitative or Competitive? 51 U. Chi. L. Rev. 1161 (1984). 18. 274 U.S. 200, 207 (1927). 19. 178 F.3d 862 (7th Cir. 1999). 20. Judge Posner has had his share of promissory-fraud cases. See also Desnick v. American Broadcasting Companies, Inc., 44 F.3d 1345, 1354 –55 (7th Cir. 1995); Price v. Highland Community Bank, 722 F. Supp. 454, 460 (N.D. Ill. 1989). 21. 178 F.3d at 865 –66 (citations omitted). 22. 709 So. 2d 39 (Ala. Civ. App. 1997). 23. 608 S.W.2d 585 (Tenn. Ct. App. 1980). 24. Id. at 588. 25. 607 P.2d 798 (Utah 1980). 26. Transcripts of the entire opus of football cartoons can be found at (last visited February 4, 2004).

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CHAPTER 10: CONCLUSION

1. See, e.g., E. Cobham Brewer, Dictionary of Phrase and Fable 1144 (1902) (citing Richard Chenevix Trench, On the Study of Words 322 [A. L. Mayhew ed., 22d ed. 1892] [suggesting, on the other hand, that “sine cera” referred to honey without wax in it]). 2. See, e.g., George H. McKnight, English Words and Their Backgrounds 237 (1931). 3. In fact, the doctrine of caveat emptor applied only in early Roman law. A. Rogerson, Implied Warranty Against Latent Defects in Roman and English Law, in Studies in the Roman Law of Sale 112, 113 (David Daube ed., 1959). The curule aediles imposed “at an early day” an implied warranty of quality to goods sold on the open market, William L. Burdick, The Principles of Roman Law and Their Relation to Modern Law 445 (1989 reprint), which means that a “sine cera” representation might have been redundant in later periods. And even under early Roman law the crafty potter might have been subject to liability. Filling the cracks with wax and painting over them might be considered a form of deceit, and fraud was considered an exception to caveat emptor. Rogerson, supra, at 113. But since the etymological story itself turns out to be apocryphal, we ask the reader to indulge us in a somewhat fictional account of Roman law. 4. Oliver Wendell Holmes, The Path of the Law, 10 Harv. L. Rev. 457 (1897), reprinted in 110 Harv. L. Rev. 991, 996 (1997). 5. See, e.g., Barkley Clark & Michael J. Davis, Beefing Up Product Warranties: A New Dimension in Consumer Protection, 23 U. Kan. L. Rev. 567 (1975); Sidney Kwestel, Freedom from Reliance: A Contract Approach to Express Warranty, 26 Suffolk U. L. Rev. 959 (1992); George L. Priest, A Theory of the Consumer Product Warranty, 90 Yale L.J. 1297 (1981); Curtis R. Reitz, Manufacturers’ Warranties of Consumer Goods, 75 Wash U. L.Q. 357 (1997); Alan Schwartz & Louis L. Wilde, Imperfect Information in Markets for Contract Terms: The Examples of Warranties and Security Interests, 69 Va. L. Rev. 1387 (1983); Richard E. Speidel, Warranty Theory, Economic Loss, and the Privity Requirement: Once More into the Void, 67 B.U. L. Rev. 9 (1987). 6. See, e.g., Robert H. Jerry II, The Wrong Side of the Mountain: A Comment on Bad Faith’s Unnatural History, 72 Tex. L. Rev. 1317, 1336 (1994) (stating that good faith “emphasizes faithfulness to an agreed common purpose and consistency with the justified expectations of the other party” and excludes “bad faith” conduct that violates “community standards of decency, fairness or reasonableness”). See generally Steven J. Burton, Breach of Contract and the Common Law Duty to Perform in Good Faith, 94 Harv. L. Rev. 369 (1980); E. Allan Farnsworth, Good Faith Performance and Commercial Reasonableness under the Uniform Commercial Code, 30 U. Chi. L. Rev. 666 (1963); Robert S. Summers, The General Duty of Good Faith—Its Recognition and Conceptualization, 67 Cornell L. Rev. 810 (1982); Robert S. Summers, “Good Faith” in General Contract Law and the Sales Provisions of the Uniform Commercial Code, 54 Va. L. Rev. 195 (1968). 7. See Stephen L. Carter, Integrity 33 (1996) (stating that our “respect for contracts” rests on “the belief that a person of integrity will do what she has promised”). 8. See Daniel Markovits, Contract and Collaboration, 113 Yale L.J. 1417 (2004); Dori Kimel, From Promise to Contract: Towards a Liberal Theory of Contract 7–31 (2003).

Notes to Pages 206–11

APPENDIX A: DRAFT PRESTATEMENT OF THE LAW OF INSINCERE PROMISING

1. Cf. Prosser and Keeton on Torts (5th ed.) § 105 (p. 728). 2. Cf. Fed. R. Civ. P. 9(b); 15 U.S.C. § 78u-4(b)(2) (2000). APPENDIX B: PROMISSORY FRAUD ABROAD

1. 29 Ch. D. 459, 483 (Ch. App. 1885). While Edgington is often described as the first promissory-fraud case, it had numerous antecedents. In the United States, section 1572 of the California Civil Code, adopted in 1872, included in its definition of “actual fraud” “[a] promise made without any intention of performing it,” a provision that could sustain an action for deceit. See, e.g., Ayers v. S. Pac. R.R. Co., 159 P. 144 (Cal. 1916). And while we don’t find in the United States any pre-Edgington promissory-fraud actions per se, courts did use findings of promissory insincerity to support rescission, reconveyance of wrongfully obtained property, and even trover. Goodwin v. Horne, 60 N.H. 485 (1881) (rescission); Gross v. McKee, 53 Miss. 536 (1876) (same); Frazier v. Miller, 16 Ill. 48 (1854) (same); Donaldson v. Farwell, 93 U.S. 631 (1876) (reconveyance); Dowd v. Tucker, 41 Conn. 197 (1874) (same); Laing v. McKee, 13 Mich. 124 (1865) (same); Hall v. Naylor, 18 N.Y. 588 (1859) (same); Ayres v. French, 41 Conn. 142 (1874) (trover). While subsequent cases interpreted some of these holdings narrowly, see, e.g., Miller v. Sutliff, 241 Ill. 521, 527 (1909) (holding that the facts in Frazier v. Miller, 16 Ill. 48 [1854], were “exceptional in character”), these cases at least recognized the idea of promissory misrepresentation and contained the conceptual pieces of the doctrine of promissory fraud. See, e.g., Ayres, 41 Conn. at 154 (“Where lies the fraud in buying goods with an intention not to pay for them? It lies in the fact that the fraudulent purchaser gives the seller to understand that his intention is to pay for them. His deceit therefore is in his statement with regard to his intention.” [emphasis added]). In fact, at least one state, Nebraska, first adopted the doctrine of promissory fraud by citing U.S. precedent rather than Edgington. McCready v. Phillips, 56 Neb. 446 (1898) (citing Ayres v. French, 41 Conn. 142 [1874]; Dowd v. Tucker, 41 Conn. 197 [1874]; Gross v. McKee, 53 Miss. 536 [1876]; Goodwin v. Horne, 60 N.H. 485 [1881]); see also Albitz v. Minneapolis & Pacific Ry. Co., 42 N.W. 394 (Minn. 1889). 2. 29 Ch. D. at 483. 3. Stephen Graw, An Introduction to the Law of Contract 214 –15 (1990) (Australia); K. Shanmukham, 1 Singhal & Subrahmanyan’s Indian Contract Act, 408, 435, 437 (4th ed. 1999); Carole Pedley Chui, Law of Contract in Hong Kong 94 (1988); I. E. Sagay, Nigerian Law of Contract 237–38 (1985). 4. Indian Contract Act § 17(3) (1872), Act No. 9, 25 Apr. 1872, available at http://www. indialawinfo.com/bareacts/contract.html (last visited Aug. 16, 2004). 5. See, e.g., Obaidul Huq Chowdhury, Contract Act, 23 –24 (2d ed. 1992) (Bangladesh); Shaukat Mahmood & Nadeem Shaukat, The Contract Act 125, 129 –30 (4th ed. 1993) (Pakistan); Singhal & Subrahmanyan, supra note (India). 6. Singhal & Subrahmanyan, supra note 3, at 438. 7. [1976] 1 All E.R. 65, HL. But see Buxton v. The Birches Time Share Resort Ltd. [1991] 2 N.Z.L.R. 641 (New Zealand).

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8. (1983) 5 T.P.R. 454 (Australia). 9. R. H. Christie, The Law of Contract in South Africa, at 330 –31 (2d ed. 1991). Christie also recognizes that a promisor’s knowledge that her performance was impossible is strongly probative of a lack of intent: “In the absence of [a testimonial admission] it may be very difficult to prove that a statement of intention about the future was a misrepresentation, but since the ordering of goods on credit or the giving of a post-dated cheque amount to representations of present belief in ability to pay in due course, evidence of financial position and prospects of the maker of the representation may lead to the conclusion that the belief was not in fact held.” Id. 10. See generally Regina v. Lambie, [1982] A.C. 449 (H.L.[E.]); Regina v. Charles, [1977] A.C. 177 (H.L.[E.]). 11. The prospect of punitive damages is not, of course, the only reason to bring an action for promissory fraud. As we noted above, in the seminal case of Edgington v. Fitzmaurice, 29 Ch. D. 459, 483 (Ch. App. 1885), the plaintiff ’s motive for pursuing a tort theory of fraud instead of a simple contract theory was not to secure punitive damages but seems to have been to accelerate payment of the principal on debentures. And there are the many situations in which contract damages are not available that we explored in chapter 7. But the possibility of punitive damages is probably the most compelling reason. 12. BGH [Supreme Court], Neue Juristische Wochenschrift [NJW] 1953, 836 (this German case has been subject to some criticism, see, e.g., Kühl Lackner and Maassen Dreher, Kommentar zum Strafgesetzbuch § 263 43 (1999)); 22 KEISHÛ 6-434 (Sup. Ct., June 6, 1968) (Japanese criminal case dealing with fraudulent promises); 9 KEISHÛ 9-1856 (Sup. Ct. July 7, 1955) (same). 13. Art. 508 bis Strafwetboek (Belgium); Art. 508 ter Strafwetboek (Belgium). 14. Article 1116 of the Code civil provides that “dol is a cause for nullity of an agreement when the artifices used by one of the parties are such that it is evident that, without such artifices, the other party would not have contracted.” P. D. V. Marsh, Comparative Contract Law: England, France, Germany, 125 (1994). On the scope of the concept, see id.; Barry Nicholas, The French Law of Contract, 100 – 6 (2d ed. 1992). Compare too Greece’s Civil Code § 919: “A person who has intentionally caused prejudice to another in a manner contrary to morality shall be liable for compensation.” Greek Civil Code, 131–32 (Constantin Taliadoros trans. 2000). 15. Nicholas, supra note 14, at 101–2. 16. See generally Friedrich Kessler & Edith Fine, Culpa in Contrahendo, Bargaining in Good Faith, and Freedom of Contract: A Comparative Study, 77 Harv. L. Rev. 401 (1963– 64). Farnsworth discusses the applicability of the culpa in contrahendo doctrine to precontractual liability, though he concludes that “even in Europe it is difficult to find cases that actually impose precontractual liability where an American court would clearly not do so on other grounds.” E. Allan Farnsworth, Precontractual Liability and Preliminary Agreements: Fair Dealing and Failed Negotiations, 87 Colum. L. Rev. 217, 239 –40 (1987). 17. Kessler & Fine, supra note 16, at 404 – 5. 18. See BGH [Supreme Court], Neue Juristische Wochenschrift [NJW] 1975, 43 (Germany); BGHZ 1992, 176 (Germany); BGH NJW-Rechtsprechungs-Report Zivilrecht [NJWRR] 1989, 626 (Germany).

Index

Note: Page numbers followed by “g” indicate graphs. Those followed by “t” indicate tables. A full index to all cases cited in this book can be found at http://islandia.law.yale.edu/ ayers/promissoryfraudcaseindex.pdf. actions, 120, 122, 124 –25, 135 – 40 actual optimal expectation damages, 68 adequate assurance, 165–68 African Americans, 5, 185, 195, 197 agency, 52– 53, 117 Alabama, 5, 6, 48 – 49, 52–53, 195 – 97, 198; punitive damages and, 212 Alabama Supreme Court, 40, 49, 192 Alaska Packers’ Association v. Domenico (9th Cir. 1902), 160 –61, 195 “alternative performance” contracts. See option contracts ambiguity: of contract language, 107– 8; of motive evidence, 112; of promise, 55, 58, 140 American Criminal Law (Wharton), 177 American Rule, 33, 71–72, 79, 212

Arkansas, 6; “Hot Check” Law, 189 Arkansas Supreme Court, 191– 92 Arms-length transaction, 30, 102, 109 Atiyah, P. S., 2 Austin, J. L., 21, 215n1 Australia, 211 bad checks, 171, 186 –91, 211 bad faith: dol concept and, 213; precontractual negotiation in, 142, 148 – 50; promises in, 142, 155 – 56 bad-faith modification, 7–8 Bailey v. Alabama (1911), 5, 121, 185, 191, 193, 195 –98 bait advertising, 149 Baker v. State (Ala. Crim. App. 1991), 134 Bangladesh, 211 285

286

Index

behavioral effects, 86 –89, 91– 99; past behavior and, 15, 123 –24, 125 Beijing Metals & Minerals Import/Export v. American Business Center (5th Cir. 1993), 132 Belgium, 213 beliefs, 116, 135; predictions and, 146, 147, 148; as reasons for promises, 136–39 Beneficial Personnel Services v. Rey (Tex. App. 1996), 117 Berkeley Bank for Cooperatives v. Meibos (Utah 1980), 198 –99 bilateral promises, 30 binding offer, 151, 152 black-letter law, 147 “blame the victim” rationale, 176 blank promises: argument against, 84, 85 – 86, 90 –92, 95 – 99, 107, 158, 165; behavioral effects of, 91, 92; definition of, 22, 24, 44t, 98; liability law and, 78, 85 – 86, 87, 90, 93, 98 – 99; representation of intent of, 22–26, 37, 38, 39, 45; warranting promises and, 43 – 44 Bowen, Lord, 4, 86, 143, 195, 210 –11 breach of contract: adequate assurance and, 165–68; anticipation costs and, 70, 100; changed circumstances defense for, 15, 116, 120; change of mind defense for, 115 –16, 119, 120; chilling effects on, 16 –17, 113; as circumstantial evidence, 129, 130t; defective formations and, 150 –63; denial of promise and, 132–33; doctrine of chances and, 125, 134, 145, 149, 152, 180; Holmesian “wrong conduct” view of, 5; initial probability of performance and, 127, 165; law of insincere promises recovery vs., 17, 62, 66– 69, 71, 78 –79; low probability of performance and, 94 – 95; Lumley doctrine and, 185; nonrecoverability instances of, 150 – 63; nonrecoverability of litigation costs for, 7, 33, 71–72; obligations and, 19; parol evi-

dence rule and, 198; pattern of, 15; postinformation assurances and, 165– 67; promissory fraud claims vs., 59, 60, 132–33, 156, 196, 209; remedies for, 65 – 69 (see also damages); repetitious pattern of, 15, 125; scheme-or-device requirement and, 113; separate promissory fraud action and, 59; separate recovery for, 209; sequential performance and, 111; subcompensatory damages for, 61, 62, 71–72, 73; time element and, 121–22, 196; TINALEA clause and, 157–58; weaknesses of, 34, 69, 71, 73. See also nonperformance British Airways Board v. Taylor (HL 1976), 211 British Commonwealth, 210 –11, 212 Brungard v. Caprice Records, Inc. (Tenn. Ct. App. 1980), 131– 32, 198 Buck v. Bell (1927), 197 burden of proof, 113 –14, 154, 171, 185, 190, 205 Bush, George H. W., 4, 162, 200 Calabresi, Guido, 74 California, 5, 176 California Supreme Court, 173, 176 –78 Carlill v. Carbolic Smoke Ball (1893), 151, 152, 195 categorical interpretation, 9 –14, 30, 84 – 85, 86; all promises as positive under, 22, 29, 37; alternatives to, 12–14; basis of, 21–22, 48; definition of, 20, 47, 84; drawbacks of, 20 –21, 29, 84 –88, 108; as interpretive default, 87; intuitive appeal of, 93; material representations and, 40, 41; modern codification of, 195 caveat promisee rule, 107 certainty, criminal liability and, 180 –81 chances, doctrine of, 125, 134, 145, 149, 152, 180 changed circumstances, 15, 116, 120 –21, 123; conditional intentions and, 120,

Index

129; contract damages and, 204 – 5, 205g; crime of false promise and, 182, 183; crime of seduction and, 192; Holmesian theory of, 196; unenforceable agreements and, 159 change of mind, 4, 14 –15, 115 –16, 119, 120, 121, 137, 162; partial performance and, 183; unenforceable agreements and, 159 Changing Your Mind (Farnsworth), 14 –15 Chaplin v. United States (D.C. Cir. 1946), 173, 175 –78 Charlie Brown (cartoon character), 200 chastity, 191, 192 check statutes, 190 – 91, 211; bad-check passing and, 171, 186 –91, 211. See also crime of passing bad checks Christie, R. H., 211 Chung v. Kaonohi Center Co. (Haw. 1980), 28 circumstances. See changed circumstances circumstantial evidence, 114, 115, 118 – 40; independent, 130; of intent to perform, 119 –26, 126t; of knowing misrepresentation, 115, 130 –35, 135t; of objective probability of performance, 126 – 30, 130t; structural evidence of motive and, 135 –40 civil action. See civil liability civil liability, 8, 12–18, 19, 34, 59 – 82, 142, 204; arguments for, 60 –65, 69 –73; bait advertising and, 149; bifurcated approach to, 77; blank promise recognition and, 85, 95 – 97; categorical interpretation presupposition in, 84; condition of performance and, 24 –26; culpability and, 47, 48 – 49; deceit actions and, 30, 47, 86 – 89, 97, 144; default potential and, 81; as deterrent, 61, 138; economic arguments and, 61–73; evidentiary bar and, 113 –15; information-poor representations and, 91– 99; information—rich representations

and, 90 –91, 98; interpretive defaults, 99 –112, 181; liability rules and, 74, 76 – 79, 82, 204; litigation costs and, 33, 71– 72, 77, 79, 212; minority rule and, 85 – 86; misrepresentation of intentions and, 11, 19, 58, 138, 144 – 45; morality vs., 4 – 5, 29, 30, 216n6; motive evidence and, 138 –39; nonenforceable breach actions and, 159 – 63; nonrecognition of, 85 –86; opaque promise recognition and, 95; opting out of defaults and, 107–8, 204; political promises and, 161–63; for postinformation assurances, 165 – 66; practical objections to, 59 – 60; precontractual, 148 –50, 213; procreative promises and, 161; for promissory misrepresentations, 45, 46, 142–43, 170; property-rule damages and, 74 –77; punitive damages formula and, 81; representational inquiry and, 84 –112; statements-ofintent action and, 143; TINALEA clauses and, 157– 58; traditional approach to, 8, 47. See also contracts; law of insincere promises Coleman, Jules, 61 Colorado Supreme Court, 86, 216n9 committing oneself, definition of, 21 common law: contracts and, 22–23; insincere promise and, 77, 171, 172, 210 –11, 212, 213; larceny by trick and, 173; past or present fraud and, 145; wrongful threat and, 161 Commonwealth v. Drew (Mass. 1837), 172 compensatory damages, 53, 111, 212, 213; extent of, 7, 17; perfect, 64; promisee choice of, 17; promissory fraud doctrine and, 7, 10, 78; promissory misrepresentation and, 79, 80; punitive damages and, 81 conditional intentions, 1, 13, 23, 24, 26 – 29, 128 –29, 130, 180; changed circumstances and, 120, 129; circumstantial

287

288

Index

conditional intentions (continued ) evidence and, 119; doctrine of excuses and, 26, 129; “good” vs. “bad” news and, 27–28, 35; motive evidence and, 138, 140; as opaque promise, 128, 129; permissible, 29, 35; undisclosed, 128 conditional promises, 24 –29, 107; conditional intentions and, 26 –29, 129; as not legally enforceable, 25; opaque promises vs., 25; range of conditions and, 27–28 Congress, U.S. 174 Connecticut, 6, 11, 12, 54 – 55 Connecticut General Life Insurance v. Jones (Fla. Dist. Ct. App. 2000), 135 Connecticut Supreme Court, 192 consideration requirement, 151, 155 –56, 168 – 69 constatives, 21–22, 203 consumer contracts, 53 – 54 context: conditional intentions and, 28; parol evidence rule and, 154 –55; positive promises and, 103, 104; probability of performance and, 103, 104; representation inquiry and, 108 –10, 155 contraception, 162 contracts, 2–3, 142– 69, 202, 204; ambiguity in, 107–8; assurance of performance and, 166– 67; bad-faith, 142, 148 –49; binding offer and, 151, 152; blank promises and, 84; breach remedies for (see breach of contract; law of insincere promises); changed circumstances and, 204–5, 205g; chilling effects on, 16 –17, 81, 88, 105, 113, 114, 115, 141; consent costs and, 30, 74 –75; context and, 108 –10; credible promissory representations and, 60; default representation and, 105 –12; defective formation of, 150 – 63; efficient, 8, 60 –65, 82, 113; formality of, 202; Holmesian notion of, 5, 20, 22–23, 202; implicit conditional promise and, 1; insincere prom-

ise in absence of enforceable, 142; interpretive defaults and, 88 – 89, 99; interpretive differences and, 11–12; legal enforcement means for, 34; meanings of promises and, 2; mistaken premises and, 43; nonstandard interpretive norms and, 109 –10; objective meaning of, 5; option, 13, 93 – 94, 96, 105 –6, 107, 157; partner selection and, 66; partyspecified sanctions and, 78; postinformation representations and, 165–68; precontractual liability and, 148 –50, 213; preformation promises and, 148 – 50; promissory fraud liability and, 6, 8, 16 –17, 82; promissory misrepresentation liability and, 79, 82; punitive damages and (see punitive damages); rational factors for entering, 31– 32; reasonable-reliance rule and, 67–68, 72; recovery for nonpecuniary losses and, 72; renegotiation under duress and, 111; semiwarranting promises and, 97, 98, 102; sequential performance and, 95; successful formation of, 163– 65; “take-or-pay,” 10, 93 – 94, 105, 107; tort principle and, 2, 8; unenforceable, 142, 150 –63, 168 – 69; uninformed signing of, 53 –54. See also Second Restatement of Contracts Cooter, Robert, 74 corporate entities, 52–53, 117, 120 corporate law, 28 cost-benefits analysis, 31–32, 62– 63, 66– 67; profit ratio and, 111; reasons for promises and, 136 –39 costs: of anticipated breach, 79, 100; of blank promises, 96; condition of performance and, 24; of contractual consent, 74 –75; of deceit in precontractual negotiations, 149; of false positive promises, 69; of fully warranting promise, 100 –101; internalized, 74, 77, 79; liabilty rules and, 74; of litigation,

Index

33, 71–72, 77, 79, 212; of lost opportunities, 30–31, 149; majoritarian defaults and, 99–100; motive evidence and, 138; of negligent promissory misrepresentation, 75–76, 77; of nonperformance, 34, 63, 66–67, 77; of performance reliance, 30–31; of promissory misrepresentation liability, 69, 74, 75; of reliance (see reliance costs); of risk and riskavoidance, 76; sequential performance and, 111; social, 74, 158. See also damages courts. See civil liability; crime of false promise; evidence; representational inquiry Craig v. Forest Institute of Professional Psychology (Ala. Civ. App. 1997), 120 –21 Craswell, Richard, 74 –75, 80; optimal-reliance proposal of, 67– 68, 69, 70 –71; price-selection analysis of, 65, 66, 67 credible promissory representation, 60, 61– 65, 73 credit card deceit, 211 crime of false promise, 5, 7, 8, 19, 46 – 48, 63, 170 –93; bad-check passing and, 171, 186 –91, 211; burden of proof bar for, 171; chilling effects of, 176, 177; contemporary, 178 – 86; criticisms of, 171, 179 – 80; debate over, 175 –78; definition of, 207; direct evidence and, 116; evidentiary errors and, 182–85; as federal crime, 174; German and Japanese analogues of, 213; higher evidentiary bar for, 115, 171, 185; historical background of, 171–75; historical misuses of, 185 – 86; Holmes’s dissent on, 5, 121, 195 – 96; improper convictions and, 176, 177, 185; minority rule on, 86; misuse of, 171, 191; pattern of deceit and, 179; proper bounds of, 180 – 82; reform recommendations for, 171; responsibility and, 45; seduction and, 171, 191– 93; social control potential of, 191; veracity inquiry and, 83

crime of passing bad checks, 171, 186 –91, 211 crime of seduction, 171, 191– 93 criminal acts, 158, 190 – 91 criminal intent, 190 criminal liability. See crime of false promise criminal sanctions, 7 culpability, 47–58, 140; crime of false promise and, 178, 180 –84; degrees of, 46, 74, 181–82; as knowing misrepresentation, 115, 124, 161; as reckless misrepresentation, 119; scienter inquiry and, 83; unknowing, 52–54, 75, 140; veracity vs. scienter inquiry and, 50 – 58. See also intent to deceive culpa in contrahendo, 213 damage multiplier, 71, 78, 80; nonrecoverable, 138 damages, 32–34; below expectation, 33, 165; blank promise costs and, 96, 158; changed circumstances and, 204 –5, 205g; context and, 109 –10; decoupled from actual reliance, 64; emotional, 7, 72, 79, 138; explicit waivers of, 71; full expectation, 32, 34, 65 –69, 70; full reliance, 66, 68, 70, 111–12, 137–38; functions of, 17, 23, 61, 66, 68 –69, 74, 80 – 81, 138, 153, 212; limitations on, 79, 80; liquidated, 94; measure of, 16 –17, 77– 81, 205; motive evidence and, 138; as nonperformance alternative, 5, 6, 7, 13, 20, 23, 34, 66, 165, 180, 205, 209; optimal expectation, 67–69, 71; opting out of, 157, 158, 204; parol evidence and, 153 – 54; participation constraints and, 165; price-selection analysis and, 66–67, 69, 73, 82; probability of performance and, 34, 66, 68; promisor’s underestimate of, 138; property-rule, 74 –77; reasonable-reliance rule, 67– 68, 72; recoverable, 32; secondary effects of,

289

290

Index

damages (continued ) 16 –17; specific-performance, 66, 71, 72, 80, 81, 110, 181; subexpectation but superreliance, 33 –34; supercompensatory, 212; TINALEA clauses and, 157–58; uncertainty and, 33; uncompensated, 13; underenforcement of, 71; for unobservable (“speculative”) harms, 33. See also expectation damages; punitive damages; subcompensatory damages Darby v. Johnson (Ala. 1985), 120 Davis v. State (Ark. 1910), 191 D.C. Circuit Court, 173 D.C. Court of Appeals, 175 –78 DeBruler, Roger O., 166 deceit: basis of legal action on, 30, 47– 48, 86 – 89, 97, 144; elements of, 114; evidence of, 114, 119, 124, 130 – 35, 198; intent and, 11, 15, 47– 48, 49, 50, 119, 130 – 35, 144 – 45; lying as, 3 – 8; pattern of, 134, 179, 180, 197; in precontractual negotiation, 148 – 50, 213; profits outweighing costs of, 138; scienter requirement formulation for, 54, 143; theft by, 175, 183, 190. See also crime of false promise; promissory fraud; promissory misrepresentation default representation, 12–13, 17, 99–112, 188; as definite-probability, 102–5; interpretation rule and, 88, 99–102, 181; motive evidence and, 112; opting out of, 105–12, 157, 203, 204; as semiwarranting, 84, 88, 98, 99, 101–2, 104–5, 119 default rule, 73 defective formation, contractual, 150 – 63 defensive promissory misrepresentation, 161, 169 definite-probability representations, 38 – 41, 45, 88; contracting around, 106, 107; default interpretation and, 102–5; definition of, 38 –40, 44t, 51; evidence of fraud and, 181; as express statements, 105 – 8; as information-rich, 90 – 91, 92,

98; intent to perform and, 38 –41, 106; liability and, 98; misrepresentation and, 51; as objective probability of performance, 127, 128; participation constraint and, 110; positive promise vs., 103; undisclosed conditional intention and, 128 Delaware corporate law, 28 denial of promise, 132–33, 211 deterrence: damages as, 66, 74, 138; jurisdictional differences in, 213; in laws of promissory fraud and misrepresentation, 77, 138; liability-rule, 74, 76, 77, 78, 79, 82, 204; property-rule, 34, 61, 74 –76, 80–81; punitive damages as, 17, 61, 80– 81, 82, 153; of sincere promisors, 91 direct evidence, 116 –18 disclaimers, 105 disclosure, 213 discrimination, 8, 185 –86, 191, 193, 195, 197 disjunctive intention, 13 District of Columbia, 175, 175 –78, 182 distrust, 34 doctrine of chances, 125, 134, 145, 149, 152, 180 doctrine of excuses, 26, 129 dol (French fraud concept), 213 Draft Prestatement of the Law of Insincere Promising, 205, 206 – 9 dual representational default, 12–13, 104 duress, 111, 161, 169 Durland v. United States (1896), 172, 174 duties, 2, 26, 28, 102, 202, 203 economic activity, 61–73, 137– 38, 177; bad checks and, 186 –91. See also costs; damages Edgerton, Henry, 173, 176, 178 Edgington v. Fitzmaurice (Ch. App. 1885), 86, 117, 173, 195, 210 –11 efficiency, contractual, 8, 60, 61, 65, 82; argument from, 61; chilling effect on, 113; credible information and, 63 –64

Index

election promises, 162 embezzlement, 174 emotional damages, 7, 72, 79, 138 employment contracts, 185, 195 – 96 England. See Great Britain entitlement to performance, 7 error. See mistake doctrine evidence, 105 –12, 113 – 41, 211; actions as, 120, 122, 124 –25, 135 –40; circumstantial, 114, 115, 118 –40; for crime of badcheck passing, 189 – 91; for crime of false promise, 171, 180 –81, 182–85; of deceit, 114, 119, 124, 130 – 35, 198; direct, 116 –18; heavy burden of, 113 –14; independent, 130, 131; of intent-to-deceive, 131– 34, 135t; motive and, 16, 17, 110 –12, 135 – 40; promise/breach time lapse as, 121–22; of promisor’s initial intent, 15; of promissory misrepresentations, 9, 16, 52, 60, 145; promissory representations and, 84, 105 –12; representation inquiry and, 89, 105 –12; rule flexibility and, 105; scienter inquiry and, 114, 124, 196; sufficiency monitoring of, 199; veracity inquiry and, 196 excuses, doctrine of, 26, 129 Ex parte Lumpkin (Ala. 1997), 40 – 41, 108, 128, 139 –40 expectation damages, 7, 8, 32, 34, 81, 153, 205; function of, 66, 67, 68 –69, 204; inefficient promisee reliance and, 64; optimal, 67– 69, 71; proper structuring of, 65 –69, 70 expectations range, mutual, 27 expressed intention, 35, 97, 103, 107, 143–45 expressive retribution, 61 express probability representations, 57t, 78, 167 express statements, 105 –8 extortion, 161 fact: circumstantial evidence and, 118 – 35; knowing misrepresentation of, 134, 135t; mistakes of, 51– 52, 54; nondisclo-

sure of, 102; predictions vs. statements of, 147; promises vs. statements of, 1–2, 86; state of mind as, 4, 5, 86, 143, 195, 210 –11 fact finder, 108 fact-finder error, 17, 72, 181 failed negotiations, 149 fair dealing, 202 falsehood. See deceit; lie; promissory misrepresentation false predictions, 142, 145 – 48 false pretense, 172–79 false promise. See crime of false promise Famiglietti v. Brevard Medical Investors (Ga. Ct. App. 1990), 125 Farnsworth, Allan, 14 –15 F.D. Borkholder Co. v. Sandock (Ind. 1980), 166, 167 federal crime of false promise, 174 Federal Express (FedEx), 13, 38, 40 federal mail-fraud statute, 170, 172, 173, 174 Federal Rules of Procedure, 114 Federal Trade Commission Guides Against Bait Advertising, 149 fidelity, 83, 86, 87, 89, 105, 108; majoritarian defaults and, 99 Fidelity-Philadelphia Trust v. Simpson (Penn. 1928), 117 Fine, Edith, 213 first-order rule, 88 first-person statements of intent, 143 First Restatement of Contracts, 150 formation cases, 163– 65 forward-looking statements. See predictions France, 213 fraud: bad checks and, 171, 186 –91; intent and, 49; mistake vs., 12; nonpromissory, 77; predictions and, 145 –46, 147– 48; promissory misrepresentation and, 11, 19, 61, 102, 153 –55; statute of, 6; theft by false pretenses and, 172; victim vulnerability to, 176 –77. See also promissory fraud; Statute of Frauds

291

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Index

frivolous suits, 71, 81 full expectation damages, 32, 34; function of, 66, 67; proper structuring of, 65 – 69, 70 full reliance damages, 66, 68, 70, 111–12, 137–38 fully compensatory damages. See compensatory damages fully warranting representations, 41– 42, 43 – 44, 44t, 45; contracting around, 106, 108; costs of, 100 –101; default representation and, 100, 108; definition of, 41– 42, 44t, 45, 51; high-assurance representation and, 111–12; as information-rich representation, 90 –91; liability and, 98; mandatory interpretive rule and, 92, 98, 101; misrepresentation and, 51; objective probability of performance and, 127, 128; participation constraint and, 110; trust relationship and, 108 –9 functionalism, 18, 203 – 4 future statements. See predictions Gadsden Paper & Supply Co. v. Washburn (Ala. 1989), 132 Galaznik v. Galaznik (Tex. Ct. App. 1984), 159 Gardiner v. Suttons Motors (Homebush) Pry Ltd (Australia 1983), 211 Georgia crematorium case, 125, 179 German National Bank v. Princeton State Bank (Wis. 1906), 52, 124, 128 Germany, 213 Gibson v. John D. Campbell & Co. (Tex. App. 1981), 132 Gilmore, Grant, 2 Glendale Federal Savings and Loan v. Marina View Heights Development (Ct. App. 1977), 123 good faith, 202 “good” news conditional intention, 28, 35 gratuitous promises, 62

Great Britain, 172, 210 –11, 212 Gulliver’s Travels (Swift), 176 –77 Hadley rule, 68, 72, 101 Hameyer v. State (Neb. 1947), 174 –75 Hammonds v. Turnipseed (Ala. Civ. App. 1997), 125, 133, 198 Hampton, Jean, 61 Hand, Learned, 76 H Enterprises International v. General Electric Capital (D. Minn. 1993), 55 high-assurance representation, 13, 111–12, 137 high-probability representation, 111–12 Hillcrest Center v. Rone (Ala. 1997), 24 – 25, 129, 130, 138 – 39 Hoffman v. Red Owl (Wis. 1965), 148 – 49, 195 Holmes, Oliver Wendell, 4–6, 7, 10; Bailey dissent of, 5, 121, 195 –98; contracts and, 5, 20, 22–23, 202; on law vs. morality, 4, 30; promises and, 13, 14, 17, 22–23 honest mistake, 46 illegal performance, 26, 185 illegal promises, 158 – 60, 169 Illinois, 6, 113; promissory fraud liability and, 156; scheme-or-device requirement and, 113, 197– 98; scienter requirement and, 49 illusory promises, 151, 156 – 57 implicit conditional representation, 1 implicit representation, 131, 149, 163 implied warranty of fitness, 102 impossibility doctrine, 6 impossible performance, 26 impracticable performance, 26 inability to perform, prior knowledge of, 121 incentive problem, 64, 65, 67–68 (see also motive evidence) independent evidence, 130, 131

Index

Indian Contract Act of 1872 (Britain), 211 inefficient reliance, 72 information: disparity in, 70; incentive effects on transfer of, 83; maximized disclosure of, 100; on probability of performance, 64 – 65, 70, 97, 100, 111, 203 – 4; on promisor intent, 3, 8, 64 – 65, 67–68, 97, 163–64, 165, 202, 203 – 4; sharing of, 21–22, 203; sources of, 111 informational effects, 63 – 64, 73, 82, 87, 88, 89, 105; higher default representation and, 104; opting over or under and, 107 information-forcing defaults, 99 –100, 101 information-poor representations, 90, 91–99, 106, 110, 111 information-rich representations, 90 – 91, 92, 98; on intent, 106, 107 initial intent, 118, 119 –23; change of mind and, 116, 137; crime of bad-check passing and, 189; crime of false promise proof and, 171, 180, 183; crime of seduction and, 191–93; of nonperformance, 119 –20, 124, 130t; nonpromissory misrepresentation and, 145; performance outcome and, 128; time interval and, 15, 121–22 injury, intentionally inflicted, 176 –77 innocent conviction, 176, 177, 185 innocent misrepresentation, 16 In re Cornner (Bankr. N.D. Ala. 1995), 132 In re Marriage of Fricke (Ill. App. Ct. 1988), 117, 122 insincere promises. See law of insincere promises; promissory fraud; promissory misrepresentation intent. See intent not to perform; intent to perform; representations of intent intentional injuries, 176 –77 intentional misrepresentation, 48, 50, 146 intent not to perform, 44, 48, 49, 85, 90, 91, 95 – 97, 180; circumstantial evidence and, 119, 132; court distinguishing of,

114, 115; crime of false promise and, 171, 178, 179 –80; deterrence for, 153 (see also punitive damages); direct evidence and, 116–18; false promise proof of, 171; illusory promises and, 156 –57; information-forcing defaults and, 101; intent to deceive and, 11; mandatory interpretive rule and, 88, 90, 91– 92, 96 –99, 168, 180; motive evidence and, 136 – 39; not intending to perform vs., 10, 23 –25, 42; objective manifestations of, 113; oral promises and, 153; partial performance and, 184; procreative promises and, 161; puffery and, 151, 152, 153; unenforceable promises and, 159, 168. See also blank promises; opaque promises intent to deceive, 11, 15, 47– 48, 49, 50, 119, 124; evidentiary basis of, 131– 34, 135t. See also intent not to perform intent to induce reliance, 114; deceptive, 130 – 35, 144 – 45 intent to perform, 4–11, 17, 19 –38, 195, 202; ability to perform and, 127–28; actionable statements of, 143; actions as proof of, 120, 124 –25; assurances of, 34 –35, 139 –40, 149, 165 –68; bad-check writing and, 187–88; bad-faith, 155 –56; belief in, 29, 93, 102; blank promises and, 22–23, 26, 37, 85 –86, 98; categorical interpretation as belief in, 9–11, 20, 29, 37, 47, 48, 93; categorical interpretation’s drawbacks on, 84 – 86; changed circumstances and, 15, 116, 120 –21, 123, 129, 182, 196; change of mind and, 4, 14 –15, 115 –16, 119, 120, 121, 122; circumstantial evidence of, 114, 115, 119 – 40; common understanding of, 36, 93, 103; communication of, 106 –7; conditional (see conditional intentions); context and, 108; cost of performance and, 24, 100 –101; crime of bad checks and, 186; crime of false promise and, 177,

293

294

Index

intent to perform (continued ) 178; crime of seduction and, 171; default representation of, 12–13, 17, 99 – 112, 157, 188, 203; default rule on, 73; definite-probability promises and, 38 – 41, 106; definite—probability vs. positive promises and, 103; denial of promise and, 133; different understanding of promise and, 55, 117; direct evidence and, 116 –18; disjunctive, 13; doctrine of chances and, 125, 134, 145, 149, 152, 180; of duress victim, 161, 169; duty to perform and, 102; evidence of, 15, 116–18; existing interpretations of, 84 – 86; expression of, 35; false-promise proof requirements and, 171; flexibility and vagueness of statements of, 39; illusory promise and, 156 – 57; information on, 3, 8, 64 – 65, 67–68, 97, 106, 107, 163– 64, 165, 202, 203 –4; information-poor representations and, 90, 91– 99; information-rich representation and, 90 – 91; initial (see initial intent); intent to deceive and, 11, 15, 47–48, 49, 50, 119, 124, 131; interest to perform and, 63; interpretive rules and, 87– 88, 181; as key question, 10 –11, 60; lack of, 5– 6, 7; legal views of, 11, 58, 84 – 86, 138, 144– 45; legal vs. moral view of, 5, 23; liable representation of, 101; likelihood of performance and (see probability of performance); linguistic meaning and, 87, 89, 108; mandatory interpretive rule for, 89 –99; mandatory minimum representation of (see under representations of intent); as material representations, 97; misrepresentation of, 3 – 4, 5 – 6, 11, 47, 50 – 58, 138, 143 – 50; mistakes of fact and, 51– 52; moral force behind, 4, 29 – 36; motive evidence and, 16, 17, 110 –12, 135 – 40; mutual expectations and, 27; as nonfactual, 1–2, 86; nonpromissory misrepresentations of, 142, 143 –45; not intending to vs. in-

tending not to, 10, 11, 23–25, 42, 85, 88, 96 –97, 114, 119, 156 – 57, 171, 180; objective probability of, 11, 15, 50, 52, 60, 118, 181; opaque promise and, 25, 26, 37–38, 55, 85, 92; as option, 106; partial performance and, 122, 182, 183 – 84; performative force and, 34; as positive promise, 25, 85; postinformation assurances and, 165 –66; promise as implying, 20, 202; promiser’s state of mind and, 5, 7; promise simpliciter as, 100, 102, 103; promissory representations and, 62– 65, 85 –86, 97; proof of, 207– 8; public policy violations and, 159 – 60; puffery and, 84, 139, 151–53, 168, 198; reasons for importance of, 7, 8; reassurances of, 167; recurring nonperformance and, 123 –24, 126, 127, 130t; reduced reliance and, 144; renegotiation under duress and, 111; representational inquiry and, 83 –112; representational material content and, 29 –36; scienter inquiry on, 11; scienter questions on, 56 – 57t; seduction and, 191– 93; semiwarranting promise and, 98; standards of proof and, 59; statements of, 35, 107, 143 – 45; state of mind and, 4, 5, 86, 143, 195, 210 –11; subcompensatory damages and, 8; subjective, 119 – 26, 146; time interval and, 15, 121–22, 162, 182, 213; trust relationship and, 108 –9; truthful representation of, 7; types of promises and, 25 –26, 56 – 57t; unenforceable promises and, 150 –63, 168 –69; unintentional misrepresentation of, 11, 17, 53 –54, 140, 143, 180; variables in, 31–36, 114; wish to perform vs., 122–23. See also representation inquiry; representations of intent interest to perform, 63 internalized costs, 74, 77, 79 interpretation, 11–12; of ambiguous contractual language, 107, 152; circumstantial evidence and, 119; defaults (see de-

Index

fault representation); direct evidence and, 117–18; of everyday promises, 29, 88; evidence categories and, 105 –12; existing practices of, 84 – 86, 87 (see also categorical interpretation); mandatory rules of, 87– 99, 106, 119, 168, 180; nonstandard norms and, 109 –10; proposed rules for, 84, 86 –89; reasonable, 89, 108. See also probability of performance; representation inquiry investment. See costs; optimal investment “invisible hand” function, 67 Iowa, 175 Iowa Supreme Court, 190 Japan, 213 Johnson v. State (Ind. Ct. App. 1992), 179 juries, 60, 115, 121, 141, 159; crime of false promise and, 178 justifiable reliance by promise, 114, 146, 155 Kant, Immanuel, 4, 203n6 Keeton, W. Page. See Prosser and Keeton Kentucky, 6 Kent v. White (Ga. Ct. App. 1999), 125 Kepler v. WHW Management, Inc. (Idaho Ct. App. 1992), 120 Kessler, Friedrich, 213 Kimble v. State (Ga. Ct. App. 1993), 183 knowing misrepresentation, 48, 50, 51; circumstantial evidence and, 115, 118, 130 – 35, 135t; costs of, 76 –77; court distinguishing of, 114; culpability and, 115, 124, 161; definition of, 75; direct evidence and, 116; as promissory fraud, 9, 11, 77, 149; punitive damages and, 61, 149; reckless vs., 9, 16, 17, 46 Kollar v. State (Ind. Ct. App. 1990), 183–84 lack of changed circumstances. See changed circumstances lack of consideration. See consideration requirement

lack of intent. See doctrine of chances Lane v. Fabert (Ill. App. Ct. 1989), 134 language. See speech acts larceny, 115, 172, 185; false pretense merged with, 174 larceny by trick, 173, 174 Larson, Jane, 191 law. See civil liability; crime of false promise; criminal acts law of contracts. See contracts law of deceit. See deceit; promissory fraud law of insincere promises (proposed), 8– 18; arguments for, 59 –61; breach-ofcontract remedies vs., 17, 62, 66–69, 71, 78 –79; contract efficiency and, 8, 61; default potential liability for, 81; draft presentation of, 205, 206 – 9; flexibility of, 17–18; functionality of, 18; liability expansion and, 17, 60; litigation costs recovery and, 79; measure of damages and, 16 –17; problems with current law, 9 –12, 17; representation inquiry and, 12–14; scienter inquiry and, 16, 17; structuring of, 61–62; veracity inquiry and, 14 –15, 16 law of nonpromissory misrepresentation of intent, 143 –45 law schools, teaching of promissory fraud in, 194 –200 Lefkowitz v. Great Minneapolis Surplus Store (Minn. 1957), 150 legal guarantees, 145, 202 (see also contracts) legislative action, 172 Leisure American Resorts, Inc. v. Knutilla (Ala. 1989), 48 –49, 52– 53 Leonard v. Pepsico (S.D. N.Y. 1999), 151, 152 liability. See civil liability; crime of false promise; law of insincere promises liability rules, 74, 76 –79, 82, 204; as default, 78 libertarian position, 98

295

296

Index

lie, 3 – 8; definition of, 3; honest mistake vs., 46. See also crime of false promise; deceit; promissory misrepresentation likelihood of performance. See probability of performance linguistic conventions. See speech acts liquidated damages clauses, 94 litigation costs: nonrecoverability of, 7, 33, 71–72; recovery of, 79, 212 lost opportunities, costs of, 30 –31, 149 Louisiana, 174 low probability of performance, 94 – 95, 110 –11, 119, 128 –29; objective likelihood of, 128 –29, 181; repeated assurances without performance and, 149 Lumley doctrine, 185 lying. See lie lying promises. See promissory misrepresentation MacCaulay, Stuart, 109 mail fraud, 170, 172, 173, 174 majoritarian defaults, 99 –101 Malaysia, 211 mandatory interpretive rules, 87, 89 –105, 119; contracting around, 105 –12; on intent not to perform, 88, 90, 91–92, 96 –99, 168, 180; promises in violation of, 158 – 61 mandatory minimum representation, 12, 14, 78, 94; default representation and, 13, 17; TINALEA clauses and, 158, 168 Mannington Wood Floors v. Port Epes Transport (Ala. 1995), 133 – 34 marriage: crime of seduction and, 191–93; “good” and “bad” news conditions and, 28 Maryland, 50 Mason & Dixon Lines v. Byrd (Ala. 1992), 123, 127, 139 Mason and Dixon Lines, 139 Massachusetts, 172, 173 Massachusetts Supreme Judicial Court, 173

meaning, 21–26, 202; common understanding of, 36, 93, 103; fidelity to, 87, 99; mistakes of, 50, 52–58, 143, 187. See also information; speech acts measure of damages, 16 –17, 77–81, 205 Melamed, Douglas, 74 mere puff. See puffery merger agreements, 28 Michigan, 6, 113 –14, 189 Microsoft, 144, 145 mind, state of: as fact, 4, 5, 86, 143, 195, 210 –11; knowing one’s own, 47. See also change of mind minimum behavior standard, 74, 180 minority rule, 85 – 86 misrepresentation. See knowing misrepresentation; lie; promissory misrepresentation Missouri, 123 mistake doctrine, 6, 12, 43, 50; degrees of culpability and, 46; unilateral, 43; unknowing misrepresentation and, 75, 140 mistakes of fact, 51–52, 54 mistakes of meaning, 52–58, 143, 187 misunderstandings, 54 –55, 143, 180 Model Penal Code, 170, 172, 175 monetary damages: as punitive, 81; subcompensatory, 71–72 morality, 21, 23, 30, 34 – 36, 212, 216n6; as appeal of categorical interpretation, 93; degree of falsehood and, 46; legal wrong vs., 4–5; pacta sunt servanda principle and, 5, 29, 93, 203; representations of intent and, 203; trust and, 73 Morgan v. Inter-Continental Trading (E.D. Wis. 1964), 122 motive evidence, 16, 17, 110 –12, 135 –40; scienter inquiry and, 135, 139 –40; veracity inquiry and, 135 –39 Murphy v. State (Md. 1994), 189 mutual expectations, 27 mutually beneficial transactions, 62

Index

near-zero-probability promises. See blank promises Nebraska, 174 –75, 187– 88 Nebraska Supreme Court, 188 Neely, Richard, 77 negligent misrepresentation, 16, 46, 77; definition of, 75 –76; penalties and, 78; reasonable mistake vs., 77 negotiation deception, 149 – 50 New Mexico, 162 New York, 115, 173 –74, 185; Bad Check Law, 186 non-definite-probability promises, 90, 91, 98 nondisclosure of fact, 102 nonenforceable agreements, 150 –63 nonfraudulent promissory misrepresentation, 61, 78; definition of, 207; remedies for, 208 nonknowing culpability. See unknowing culpability nonlegal penalties, 73 nonpecuniary damages, 7, 72, 79 nonperformance: changed circumstances and, 15, 116, 120 –21; change of mind and, 4, 14 –15, 115 –16, 119, 120, 121; costs of, 34, 63, 66 – 67, 77; costs vs. benefits of, 138 – 39; crime of false promise and, 179; crime of seduction and, 193; damages as alternative to, 5, 6, 7, 20, 23, 34, 66, 165, 180, 205, 209; deterrents of (see deterrence); ex post choice and, 161–63; incentives against, 34 –35, 64; initial intent and, 119 –20, 124, 130t; investment against, 61; lies and, 3 –8; low costs of, 34; measure of damages for, 16 –17, 77–81, 205; pattern of, 15, 123 –24, 125, 126, 127, 130t; penalties of, 5, 7, 30, 34, 63, 205; precaution investments against, 8; probability disclosure of, 68, 163 – 64; repeated assurances of performance and, 132; subcompensated damages from, 7,

8; time interval and, 15, 121–22; uncompensated damages from, 13; unfavorable conditions and, 123 –24. See also breach of contract nonpromissory fraud, 77, 145 nonpromissory misrepresentations of intent, 142, 143 – 45 nonpromissory prediction, 145 – 48 nonsemantic behavior, 83, 97 nonwarranting representations, 77–78; default interpretation and, 100; as information—poor, 90, 91, 92, 98, 110; legal recognition of, 98, 106, 108, 158; as non-value creating, 106 –7; semiwarranting vs., 97–98 North Carolina Supreme Court, 189 –90 North Dakota, 6 not intending to perform, 11, 93, 171, 180; alternate avenues and, 180; blank and opaque promises and, 91, 92, 96 – 97, 98; circumstantial evidence of, 119; court distinguishing of, 114; illusory promises and, 156–57; intending not to perform vs., 10, 23 –25, 42 nudum pactum, 151 objective probability, 5, 11, 15, 50, 52, 60, 118 –19, 124; circumstantial evidence of, 126 – 30, 130t; conditional intention and, 129; evidence of low, 128 –29, 181; intent to deceive and, 134; predictions and, 145 – 48 obligations: of illusory promises, 156–57; liability rule and, 204; performative force of, 34 –35, 63, 203; of promises, 3, 19, 93, 202 O’Connor, Sandra Day, 154 – 55 opaque promises, 13, 14, 17, 20, 22, 23 –24, 39, 45, 110; behavior effects of, 91, 95; blank promises vs., 96 –97; changed circumstances and, 120; conditional intention and, 128, 129; conditional promises vs., 25; definition of, 23, 24,

297

298

Index

opaque promises (continued ) 37, 44, 44t, 51; evidence of fraud and, 181; express statements and, 105 –6; falsity of, 116; illusory promise as, 157; as information-poor, 92, 106, 165; intent to perform and, 25, 26, 37–38, 55, 85, 92; legal recognition of, 95, 98; as liability limit, 77–78; as mandatory interpretive floor, 87, 88, 96 –97, 100, 108, 119, 158; misrepresentation and, 51, 128, 129; opting out of, 105 –6, 107; option contract compared with, 93 –94, 106; reassurances and, 167; subjective content of, 123 –24; truth and, 26; veracity and scienter questions on, 56t; warranting promises and, 43 –44 opportunistic promisers/promisees, 153 – 54 opportunities, costs of lost, 30 –31, 149 optimal expectation damages, 67–69, 71 optimal investment, 64, 65, 67– 68, 73, 77, 82 optimism, 123 –24, 128, 145 option contracts, 13, 96, 105 –6, 107; illusory promises and, 157; opaque promise compared with, 93 – 94, 106 oral promise, 153, 199; written instruction vs., 60, 155 Oregon Supreme Court, 133 original evidence. See direct evidence pacta sunt servanda, 5, 29, 93, 203 Pakistan, 211 parol evidence rule, 6, 60, 151, 194; potential misuse of, 153 –54; promissory fraud and, 153 – 55, 198 – 99 partial performance, 122, 182, 183 – 84 participation constraint, 31, 63, 110, 111, 119, 136, 137, 165 past behavior, 15, 123 –24, 125 past experiences, 73 Peanuts series (cartoon), 200 Peevyhouse v. Garland Coal & Mining Co. (1963), 164 –65, 194 – 95

penalties, 7, 14, 63, 73 –74, 77– 81, 100, 204; party-specified, 78 –79; three types of, 80 –81. See also damages Pennsylvania, 175 People v. Ashley (Cal. 1954), 173, 176 –78 People v. Catruna (N.Y. App. Div. 1977), 179 People v. Docherty (Cal. Ct. App. 1960), 179 People v. Miller (N.Y. Ct. App. 1902), 173 –74 perceived optimal expectation damages, 67–68, 69 perfect compensation, 64 performance: assurance of, 82; conditions of, 24; context and, 28; costs of, 31; damages for specific, 66, 71, 72, 80, 81, 110; impossibility of, 15; legal duty conditions of, 26; opaque promise and, 24 –26; partial, 122, 182, 183 – 84; representation as independent of, 22, 30; representation cojoined with, 29 –30; value of, 31. See also intent not to perform; intent to perform; nonperformance; probability of performance performance-dependent profit-generating expenditure, 61 performative force (PER), 34 –35, 63, 203 performatives, 2, 21–26 permissible conditions, 29, 35 permissive presumption, 189 –91 Petram v. Hebding (Ala. 1995), 121 Pinnacle Peak Developers v. TRW Investment Corp. (Arizona Ct. App. 1980), 154 political promises, 4, 151, 162–63, 169 popular culture, 199 –200 Popwell v. Greene (Ala. 1985), 131 positive promises, 22, 25 –26, 37, 39, 45; conditional intentions and, 27; context sensitivity of, 103, 104; costs of false, 69; as default representation, 88, 99, 100 –102, 103 –4, 119; definite-probability default and, 103; definition of, 44,

Index

44t, 51, 85; falsity of, 116; flexibility of, 103, 104; high-assurance representation and, 111–12; as information-rich representation, 90 – 91; liability and, 77–78, 98; misrepresentation and, 51, 116; mistaken making of, 55; motive evidence and, 111–12; objective probability misrepresentation and, 128; opaque promises vs., 94, 96; opting out of, 106; opting under, 106; as representational default, 84, 100 –101; subjective content of, 123 –24; TINALEA clause and, 168; value of, 103; veracity and scienter questions on, 56t; warranting promises and, 43 – 44 Posner, Richard, 60, 152, 156, 197– 98 postdated check, 188 – 89 postinformation assurances, 142, 165– 67 postinformation misrepresentations, 142 precontractual liability, 148 – 50, 213 predictions, 142, 145 – 48; contract-breaking consequences and, 5; false, 142, 145 – 48; nonpromissory, 145 – 48; overoptimistic, 145; promises as, 2. See also probability of performance present intent. See intent to perform price-selection analysis, 66– 67, 69, 73, 82 Price v. Highland Community Bank (N.D. Ill. 1989), 152 Private Securities Litigation Reform Act of 1995, 114, 147 probability of performance, 3, 7, 11–13, 14, 18, 20 –21, 30, 31– 38, 73, 202, 203, 212; assurances of, 85, 88, 106, 139 – 40, 165 – 68; assurances of high, 13, 111–12, 137; circumstantial evidence of, 126 –30; communication of, 35, 38, 74, 83, 85; context sensitivity and, 103, 104; cost— benefits approach to, 62–63, 66 –67; credible information on, 63 – 64, 73; damages expectation as neutralizing factor in, 66; default rule on, 73; definite-probability promises and, 38 – 41, 103 – 5; dual representational default

and, 12–13, 104; evidentiary problems with, 114; expressed intentions and, 97, 103; formation cases and, 163–65; fully compensated damages and, 34; highassurance representation and, 13, 111– 12, 137; incentive for, 64 –65; information about, 64 – 65, 70, 97, 100, 111, 203 – 4; information-poor representations of, 91, 92; information-rich representations of, 85, 90; intent and, 12, 18, 34 –36, 97, 102, 103, 163 –64; interpretation of, 35 – 36; interpretive defaults of, 99 –112; knowing misrepresentation of, 51, 75, 135t; legal guarantees of, 62; logical space (by representation type) of, 44t; low, 94 –95, 110 –11, 119, 128 – 29, 149, 163 –65, 181; minimum (50 percent) setting for, 12, 90, 92, 105, 158, 167; motive and, 110, 135 – 40; nonwarranting promise and, 98; objective, 5, 11, 15, 50, 52, 60, 118 –19, 124, 126 – 30; optimal investment and, 64, 65, 67– 68; overstatement of, 69; penalty setting for, 79, 100, 204; perceived optimal expectation damages and, 67–68, 69; postinformation assurances and, 165–68; predictions and, 145 – 48; as promise default rule, 73; as promisee’s primary concern, 18, 20, 34, 51, 60, 139, 203, 212; promisor’s vs. promisee’s knowledge of, 32; promissory representation of (see representation inquiry; representations of intent); proof of, 208; puffery and, 151–53; reasonable response to, 36 –37; reliance reduction and, 144; semiwarranting promises and, 43, 85, 98; sequential performance and, 111; subjective, 123 –24; time interval and, 15, 121–22, 162, 182, 183, 196, 213; as warranting promise, 41–44, 85 procreative promises, 151, 161, 162–63, 169 profit ratio, 111 promise breaking. See nonperformance promises: as action, 21; bad-faith, 142,

299

300

Index

promises as action (continued ) 155 – 56; behavioral effects of, 87– 88; bilateral, 30; binding power of, 202; categorical interpretation of, 9 –11, 20, 29, 30, 37, 41, 47, 84 – 86, 93; categories of, 1, 44, 51–52; changed circumstances and, 15; chilling effects on, 76; conditional, 24, 25, 26 –29, 107; conditions for reliance on, 31–32; constantive use of, 21–22; consumers’ unknowing, 53 – 54; content of, 203 – 4; context sensitivity and, 103, 108; without contractual obligation, 143; costs of, 30 –31; court approaches to, 84; default interpretation of 12–14, 73, 84, 88, 100, 102, 188, 203 (see also fully warranting representations; positive promises); denial of, 132– 33, 211; determination of, 84; differences in, 86; doing vs. saying aspect of, 2, 19 – 45; duty to perform and, 2, 102; enforceability of, 79; evidentiary categories of, 105 –12; explicit disclaimers and, 105; extralegal practices of, 26; false (see crime of false promise); fully vs. semiwarranting, 42– 43; gratuitous, 62; illegal, 158 –60, 169; illusory, 151, 156–57; as implied intent to perform, 4 –6, 12, 20, 84, 195; informational content of, 3, 89, 90 –99; intent implied in, 4– 6, 12, 20, 84, 86, 143, 195, 202; intent vs. likelihood to perform and, 12, 20 –21; legal guarantees backing, 60; legal nonenforceability of, 79, 86; mandatory interpretive rule for, 89 –99; mandatory minimum for, 12, 13, 14; material content of, 29 – 36; misrepresentations of, 11, 16 –17; misunderstandings of, 54 – 55, 58; moral force of, 4, 29 – 36, 203, 212; as multidimensional, 2; nonlegal interpretation of, 29, 85; objective definition of, 117; obligations of, 3, 19, 93, 202; optimal behavior incentives and, 72; as paradigmatic

performative, 2, 21–26; parallel statements in, 106; performance probability of (see probability of performance); performative force (PER) of, 34 –35, 63; political, 162– 63; as predictions, 2; procreative, 161, 162–63; against public policy, 151, 159 –61, 169; reasons for, 30 – 34, 136 – 39; reckless vs. knowing, 9; reliability problem and, 63; representational dimension of, 2, 3– 4, 7, 10 –14, 21– 45, 44t, 89 (see also representation inquiry; representation of intent); sequential performance and, 111; subjective/objective aspects of, 36 – 38; time element of, 121–22; unenforceable, 150 –63, 168 –69. See also crime of false promise; promissory fraud; promissory misrepresentation; specific types of promises promise simpliciter, 100, 102, 103 promisor’s participation constraint. See participation constraint promissory fraud, 4– 8; appropriate remedies for, 79 –83; bad-faith modification and, 7–8; bait advertising and, 149 –50; breach of contract vs., 132– 33, 156, 196, 209; chilling effect concerns about, 81, 113, 114, 115, 141, 159; civil action for, 8, 19, 61–62, 84 – 86, 113 –15, 168, 170 (see also law of insincere promises); comparison of other traditions and, 210 –13; compensatory damages and, 7, 10, 78; consideration requirement and, 156; default potential liability for, 81; default rule and, 73; definition of, 77, 80, 195, 207; denial of promise and, 132– 33; deterrents and, 80, 213; duress and, 161; evidentiary burdens and, 113 –41; ex post choice and, 162– 63; expressive retribution and, 61; falsehood vs. culpability and, 47– 48; fidelity of speech act and, 87, 89, 108; formation cases and, 163– 65; heightened pleading re-

Index

quirements and, 114; illegal promises and, 158; illusory promise liability and, 157; as knowing or reckless misrepresentation, 11, 77, 99, 149; legal inattention to action of, 6, 84 – 86; legal liability for, 8, 11, 30, 47, 59 –82, 212; legal standards for, 77, 114 –15, 156; liability openness to, 107, 168; liability shields against, 25; liability unintended consequences of, 86, 88, 89, 105; mandatory damages rule and, 78; mandatory interpretive rules and, 89 –99, 158 – 61; minority rule on, 85 – 86; nonpromissory misrepresentation and, 144, 145; other evidence of, 131– 32; parol evidence and, 153 – 55, 198 –99; pleading requirements for, 209; postinformation assurances and, 142, 165 –68; precontractual reassurances and, 149, 213; predictions and, 145 –46, 147– 48; promises against public policy and, 159 – 61; promissory misrepresentation differentiated from, 77; proof of, 140 – 41; puffery vs., 84, 139, 151– 53, 168, 198; punitive damages and, 80 –81, 82, 102, 153, 212; remedies for, 209; representation inquiry and, 12–14, 20 – 45, 83 –112, 168, 181; separate elements of, 114; separate scienter and veracity inquires on, 47, 48, 50; social reality and, 162; teaching of, 194 –200; TINALEA clauses and, 151, 157– 58, 168; understanding of, 5; unenforceable promises and, 142, 150 –63, 168 – 69; unintended consequences of, 86, 88; unknowing, 140. See also crime of false promise; Statute of Frauds promissory misrepresentation, 3 – 8, 11, 18, 142– 69, 170; appropriate remedies for, 79; bifurcated legal approach to, 77; blank promise and, 22; burden of proof and, 154; civil action for, 45, 46, 142– 43, 170 (see also law of insincere promises); conditional intentions and,

26 –29; conditions to meet, 19 –20, 30; contractual interpretations and, 11–12; cost of obtaining consent and, 75; criminalization of (see crime of false promise); culpability proof and, 47– 49, 115, 124; damage—setting for, 16, 79 – 80; defensive, 161, 169; definition of, 206; deterrence of (see damages); direct evidence and, 117; with enforceable contract, 142; evidence and, 52, 115, 117; of fact, 51–52, 54; falsity and, 115; fraudulent (see promissory fraud); illegal promises and, 158; illusory promises and, 156 –57; incentive against, 65; of intent, 3 –6, 11, 47, 50 –58, 138, 143 –45; as intentional, 48 – 50, 146; as knowing (see knowing misrepresentation); lack of consideration and, 155 –56; legal liability determination of (see law of insincere promises; promissory fraud); of meaning, 52–58; motive evidence and, 16, 17, 110 –12, 135 – 40; negligent, 16, 46, 75 –76, 149; with no enforceable contract, 142; nonfraudulent, 61, 78, 207, 208; nonpromissory of nonsubjective fact and, 50, 54; objective, 127– 30; opaque promise and, 25, 94; parol evidence and, 153 – 55; pattern of, 15; popular culture examples of, 199 –200; postinformation assurances and, 142, 165 –66; precontractual, 148 –50, 213; predictions and, 145 –47; pricing of, 74; problems with current law of, 9 –12; procreative promises and, 161; promises against public policy and, 159 –61; promissory fraud doctrine and, 3 –8; proximate cause proof and, 79; puffery vs., 84, 151–53, 198; in pure option settings, 10; as reckless (see reckless misrepresentation); representation inquiry and, 12–14, 20 –45, 83 –112, 168, 181; scienter inquiry and, 16, 47, 48, 56 – 57t, 58, 75, 143; simpliciter finding of,

301

302

Index

promissory misrepresentations (continued ) 78; TINALEA clauses and, 158; tort classification of, 79; unenforceable contract and, 142, 150 –63, 168 –69; as unintentional, 11, 17, 140, 143; as unknowing, 52– 58, 76; veracity inquiry and, 14 –15, 47, 56 – 57t, 58. See also crime of false promise; promissory fraud promissory representations. See representations of intent proof, standards of, 59 (see also burden of proof ) proof of intent, 207– 8 proof of proximate cause, 79 property rules, 34, 61, 74 –77, 80 –81, 204; unintended consequences of, 88; workings of, 74 –76. See also punitive damages prophesy. See predictions Prosser and Keeton, 143, 144, 146 proximate cause proof, 79 public policy: crime of seduction and, 191– 92; promises against, 151, 159 –61, 169 puffery (mere puff ), 84, 139, 151– 53, 168, 198 punitive damages, 5, 9, 80, 132, 153, 170, 181, 194, 205; chilling effect of, 16–17, 81, 88, 115; as deterrent, 17, 61, 80 –81, 82, 153; fraudulent semiwarranting promise and, 102; frequency of promissory fraud claims and, 212; instances for use of, 77, 149, 153, 154; lack of consideration and, 156; minimum amount for, 81; probability of performance and, 204; qualification for, 154; unknowing/nonreckless misrepresentation and, 53, 77 Purcell Co. v. Spriggs Enterprises, Inc. (Ala. 1983), 121 pure options, 10 pyramid schemes, 183, 184

race discrimination, 5, 185, 195, 197 Rawls, John, 26 reasonable interpretation, 89, 108 reasonable mistake, 76, 78 reasonable-reliance rule, 67– 68, 72 reasonable understanding, 89, 108; mere puff and, 151 reasons. See motive evidence reassurances, 166 reckless misrepresentation: circumstantial evidence and, 115, 119; costs of, 75, 76 – 77; evidence of, 130; interpretation of promise and, 152; knowing vs., 9, 16, 17, 46; precontractual, 149; predictions and, 147; as promissory fraud, 77, 114, 130, 144; punitive damages deterrence for, 61, 149; type of promissory representation and, 56 – 57t reckless mistakes, conditions for, 75 Red Owl. See Hoffman v. Red Owl reliability problem, 62– 63, 65, 66 – 69, 73 reliance, 130 – 35, 144 –46, 202; inefficient, 64; justifiable, 114, 146, 155 reliance costs, 30 –31, 61, 62, 111, 137– 38, 153; perfect expectation damages and, 64; performance assurance and, 140, 203; promisor’s duty to inform and, 182 reliance damages. See full reliance damages renegotiation under duress, 111 representation inquiry, 12–14, 20 – 45, 83 – 112, 168, 181; for bad-check offenses, 186 –89; categorical interpretation and, 20, 22, 29, 37, 47, 84 –86; context and, 108 –10, 155; default interpretation and, 12–13, 84, 87, 99 –112; definition of, 20, 83, 206; evidence for, 89, 105 –12, 139; express statement and, 105 –8; illusory promise and, 157; information-rich vs. information-poor representations and, 90 –99; liabilities and, 77–78; minority rule and, 85 – 86; objective meaning and, 134; oversimplifications in, 84 –86;

Index

proposed interpretive rules for, 86 – 88; TINALEA clause and, 157–58. See also veracity inquiry representations of intent, 2–14, 20 –45, 93 – 99, 202– 4; adequate assurance and, 165– 68; blank promises and, 87; conditional intentions and, 26 –29; context and, 108 –10; costs of, 75; credibility of, 60, 61–65, 73; default interpretation and, 100; default rule on, 73; express statement and, 105 – 8; extending analysis of, 36 – 38; formation cases and, 163– 65; implicit and explicit content of, 14; informational content in, 29 – 36, 51; legal credibility bolsters to, 61; legal understanding of, 23, 87; mandatory floor and, 12, 13, 14, 17, 78, 94, 158, 180; moral dimensions of, 203; motive evidence and, 110 –12; nuances in, 28 –29; objective meaning of, 134; performance conjoined with, 29 – 36; as performance-independent, 22, 29, 73; postinformation, 165– 68; as probability of performance and, 51; promisor’s misunderstanding about, 55, 58; as puffery, 151– 53; statements of intent as, 35, 107, 143 – 45; tables of, 44 – 45, 56 – 57; three functions of, 62– 65; truth and, 9, 25 –26 (see also veracity inquiry); types of, 25 –26, 51– 52, 142 (see also definite-probability representations; fully warranting representations; nonwarranting representations; opaque promises; positive promises; semiwarranting representations; warranting representations) reputation costs, 63, 73, 138 rescission, 80 Rex v. Goodhall (Eng. 1821), 172, 173, 174, 176 Rhode Island Supreme Court, 173 Ricketts v. Scothorn (Neb. 1898), 155 –56 rights infringements, 61

risk, 34, 66 – 67, 81; measurement of, 76. See also reckless misrepresentations Roback, Jennifer, 185 Rodriguez, Ivan, 197, 198 Rucker v. State (Ark. 1905), 191– 92 Rule 9(b), 114 rules, standards and, 103 sanctions. See penalties; punitive damages; rescission; specific-performance damages Scalia, Antonin, 6, 53 scheme-or-device requirement, 113, 197– 98 Schultz, Charles, 200 scienter inquiry, 16, 17, 75, 113 –41; badcheck criminalization and, 189 – 91; circumstantial evidence and, 118, 119; common neglect of, 47, 48 –49, 195; crime of false promise and, 180, 181, 196; definition of, 16, 47, 83, 114; evidence and, 114, 124, 196; motive evidence and, 135, 139 –40; proper formulation of, 54, 113; requirement for, 11, 12, 47, 50, 143; securities fraud and, 147; types of promises and, 51, 56 – 57t, 58; veracity inquiry vs., 50 – 58, 115 Second Restatement of Contracts, 43, 102, 150, 166– 67, 195 Second Restatement of Torts, 9, 20, 143, 146, 195 Securities Exchange Act of 1934, 147 securities fraud, 147– 48 seduction, 171, 191–93 self-delusional optimism, 123 –24, 128 self-interest, 45 semiwarranting representations, 41, 42– 43, 45; argument for, 97–98; arm’slength, 102, 109; contract law doctrine and, 97, 98, 102; as default representation, 84, 88, 97– 99, 101–2, 104 –5, 119; definition of, 42, 44t, 45, 85;

303

304

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semiwarranting representations (continued ) duty to perform and, 102; falsity of, 116; fully warranting vs., 42– 43; as information-poor representations, 90, 91, 98; legal recognition of, 98; liability limit and, 77–78, 92; mandatory rule and, 97– 98; motive evidence and, 111– 12; nonwarranting representations vs., 97–98; opting under, 106, 107, 108; veracity and scienter questions on, 57t sequential performance, 30, 73, 95; assurances and, 111; definition of, 42– 43, 44t sex discrimination, 185 sexual relations: crime of seduction and, 171, 191– 93; procreative promises and, 151, 161, 162–63, 169 sincerity, 201–2, 204 Singapore, 211 Singhal and Subrahmanyan, 211 social control, 191, 193, 197 social costs, 74, 158 socially undesirable behavior, 74, 76 South Africa, 211 South Carolina, 6 Southwestern Properties, Inc. v. Lee (Ala. Civ. App. 1978), 122 Speakers of Sport, Inc. v. ProServ (7th Cir. 1995), 197 Specific-performance damages, 66, 71, 72, 80, 81, 110, 181 “speculative” (unobservable) harms, 33, 72 speculative damages, 7 speech acts, 21–26, 29, 204; constative dimensions of, 21–22; errors about meaning of, 50, 52–58, 143, 187; express statements and, 105 – 8; fidelity to commonly understood meaning of, 87, 89, 108; of intent, 35 – 36, 143; interpretation of, 87; as mere puff, 151; multiple meanings of, 21–26, 187, 202; as opting-out evidence, 107; parallel statements and, 106; on performance prob-

ability, 106; as performatives, 2, 21–22; predictions and, 145 – 48; promises as, 2, 4; reasonable understanding of, 89. See also representations of intent Spooner v. Reserve Life Insurance (Wash. 1955), 156 –57 standards and rules spectrum, 103 standards of proof, 59 state law: false promise criminalization and, 173, 174 –75; promissory fraud cases and, 6, 212 statements of fact. See fact statements of intent, 35, 107, 143 –45 state of mind. See mind, state of State v. Andrus (La. Ct. App. 1993), 187 State v. Basham (Mo. Ct. App. 1978), 125, 126 State v. Bierce (Conn. 1858), 192 State v. Brandenburg (Mo. 1893), 191 State v. Hogrefe (Iowa 1996), 190 State v. Hruza (Neb. 1986), 187–88 State v. Kelm (N.J. Super. Ct. App. Div. 1996), 188 – 89 State v. Vigil (Utah Ct. App. 1996), 179 Statute of Frauds, 6, 60, 151, 153 – 55, 161, 168, 194, 212 Storrs, William Lucius, 192 subcompensatory damages, 7, 8, 61, 62, 119; causes of, 71–72, 73, 79, 212 subexpectation but superreliance damages, 33 –34 subjective intent, 119 –26, 146 subreliance damages, 32–33 supercompensatory damages, 212 superreliance damages, 33 supracompensatory damages, 119 Supreme Court. See U.S. Supreme Court; specific states Suther v. State (Ala. 1898), 192 Swift, Jonathan, 176 –77 “take-or-pay” contracts, 10, 93 – 94, 105, 107; illusory promises and, 157 teaching promissory fraud, 194 –200

Index

Tennessee, 6, 114, 198 Tennessee Supreme Court, 198 Texas Workers’ Compensation Act, 117 Theft Act of 1968 (Britain), 211 theft by check, 190 theft by deception, 175, 183, 190 theft by false pretenses, 172–73, 176, 178–79 third-person statements of intent, 143 Third Restatement of Torts, 75 threats, 161 time interval, 15, 121–22, 162, 182, 183, 213; bad-check writing and, 189; changed circumstances and, 196 TINALEA clauses, 151, 157– 58, 168 torts, 46, 59, 60; categorical interpretation and, 9; conditional intentions and, 28; damages and, 79, 80; law of contracts and, 2, 8; predictions and, 146; promissory misrepresentation as, 79, 170; reckless mistake and, 75; Second Restatement of, 9, 20, 143, 146, 195; Third Restatement of, 75 Trade Description Act of 1968 (Britain), 211 transfer of information, 83 Traynor, Roger, 173, 178 Trent Partners & Associates v. Digital Equipment Corp. (D. Mass. 1999), 125 trust, 73, 203; arm’s-length transaction vs., 30, 102, 109; sanctions in lieu of, 63; unbalanced relationship and, 108 – 9 truth, 9, 10, 11; categorical interpretation and, 29; predictions and, 145; reckless disregard of, 46; types of promises and, 25 –26, 44t; veracity inquiry and, 14 – 16, 47, 83 uncertain damages, 72 uncompensated damages, 13 unconditional duty to perform, 28 unconscionability, 80 undisclosed conditional intention, 128 unenforceable promises, 142, 150 –63, 168 –69

unfavorable conditions, 123 –24 unfulfilled promises. See nonperformance Uniform Commercial Code, 42–43, 166– 67 unilateral mistake, 43, 102 unintended consequences: incentive effects on, 84; of information-rich representations, 91; of promissory fraud liability, 86, 88, 89, 105 unintentional misrepresentation, 11, 53 – 54, 140, 143, 180; damages for, 17 United Companies Financial Corp. v. Brown (Ala. 1991), 121 unknowing culpability, 52–54, 75, 140 unobservable (“speculative”) harms, 33 U.S. Congress, 174 U.S. Supreme Court, 6, 117, 172–73 value creation, 61; chilling effects on, 66, 69, 105; credible statements of intent and, 144 –45, 149; factors in, 31–34, 62, 63 – 65; promise representation and, 85, 101, 103, 106 –7. See also efficiency, contractual VanderVelde, Lea, 185 vaporware, 144 – 45 veracity inquiry, 10, 11, 12, 14–15, 16, 17, 113–41; bad-check criminalization and, 189–91; circumstantial evidence and, 118, 119; crime of false promise and, 181, 196; crime of seduction and, 191–93; culpability and, 48, 49; definition of, 20, 47, 83; intention not to perform and, 119, 132; motive evidence and, 136–39; objective prong of, 5, 126–30; scienter inquiry distinguished from, 50–58, 115; types of promises and, 56–57t victim self-help rationale, 176 Virginia, 197 Vokes v. Arthur Murray (Fla. Dist. Ct. App. 1968), 164, 195 Wade v. Chase Manhattan Mortgage Corp. (N.D. Ala. 1997), 120

305

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Wallis v. Smith (N.M. Ct. App. 2001), 162 warranting representations, 38, 41–44, 45, 51, 128, 202; definition of, 85, 206 –7; evidence of fraudulence and, 181; participation constraints and, 119; undisclosed conditional intention and, 128, 129, 140. See also fully warranting representations; semiwarranting representations Washington Supreme Court, 157 Watson v. State (Ga. 1999), 190 Wells v. State (Fla. Dist. Ct. App. 2002), 190 Wharf (Holdings) Ltd. v. United International Holdings, Inc. (2001), 117

Wharton’s American Criminal Law, 172 whistle-blowers, 159, 160, 161, 169 Whitcomb v. Moody (Tex. Civ. App. 1932), 143 – 44 Williams v. Williams (Ala. 2000), 123 wire fraud, 170 Wisconsin Supreme Court, 52, 127–28, 148 wish to perform, 122–23 words. See speech acts written instruction, oral promise vs., 60, 155 wrong, moral vs. legal, 4– 5 Yale University, 163 – 64