1. The Economic Dogma

Grounding contract in utility—conceptualizing it as a means for maximizing social welfare or the welfare of the contracting parties—leads law-and-economics scholars to conceptualize FBA rules as majoritarian defaults. Prominent economic accounts argue that the two main objectives of contract law within this framework, of ensuring allocative efficiency and of economizing transaction costs, can explain and justify the rules at hand.

Thus, an assumption is basic, in this view, if its failure implies that enforcing the contract would undermine allocative efficiency, that is: if the costs of performance exceed its benefits. In cases of mutual mistake this means that an assumption is basic if—given the facts as they really are—the promisee values the promised performance more than the promisor. In impracticability, in turn, an assumption is basic if, when it fails, the cost of producing the promised good (or providing the promised service) is greater than its value to the promisee. ^{Footnote 18}

In these cases, the parties need law to intervene and prescribe default rules for the same economic reason that explains other components of contract law’s gap-filling apparatus. Writing contracts is costly and setting up majoritarian defaults—rules that mimic the preferences of most contracting parties—minimizes transaction costs and thus maximizes the contractual pie. Law’s assistance is particularly in place for FBAs because they represent an important category of cases in which deliberate and calculated parties are likely to leave their contract incomplete. Some events, such as FBAs, are too infrequent to justify the cost of addressing them in the contract. In these cases, contact law should facilitate the contracting process by filling these gaps with ‘off-the-rack’ majoritarian default-rules. ^{Footnote 19}

To prescribe the content of the pertinent rule, law needs again to resort to allocative efficiency, since the rule most parties are presumed to prefer is the one that maximizes their joint surplus. ^{Footnote 20} This analysis is somewhat complex in cases of mutual mistake, where it needs to examine the parties’ ability to prevent the risk by acquiring information. ^{Footnote 21} It is more straightforward in cases of impracticability and frustration, where a contract’s value is maximized by allocating the risk to the superior risk bearer, namely: either the party who is “in a better position to prevent the risk from materializing” or the one who is its cheaper insurer—who can best determine “(a) the probability that the risk will materialize and (b) the magnitude of the loss if it does materialize.” ^{Footnote 22}

Pigeonholing FBA doctrines under the standard economic analysis of majoritarian defaults along these lines seems appealing. Nevertheless, it ultimately fails both because the underlying theme of majoritarian defaults necessarily mis-represents FBA cases, and since if law were to approach them as gaps that need to be filled along these lines, it should have probably eliminated FBA doctrines altogether.

2. FBA’s Distinctiveness

To see why the majoritarian default paradigm ill-fits FBA cases by failing to capture their distinctiveness, consider the psychological state that a tacit basic assumption implies. Lon Fuller and Melvin Eisenberg helpfully compare a party whose basic assumption failed to an absent-minded professor, who steps from his office into the hall as he reads a book, ‘assuming’ that the floor of the hall will be there to receive him. “His conduct,” they rightly observe, “is conditioned and directed by this assumption,” but “the possibility that the floor has been removed does not ‘occur’ to him, that is, is not present in his conscious mental processes.” ^{Footnote 23}

In other words, while the majoritarian default analysis of FBA cases assumes a deliberate decision by the parties not to address a particular risk, these cases actually do not involve consciousness of alternatives of either party. ^{Footnote 24} Indeed, as Eric Posner notes, in this account the parties are never, properly speaking, mistaken. Rather, they are portrayed as “[having] probability distributions that reflect information they have about the world. They know that they do not possess the absolute truth and would not believe otherwise.” ^{Footnote 25} Judges, who actually adjudicate FBA cases, know better. They do not share the economic view of the cases at hand, but rather consider the FBA doctrines as an application of a specific solution to a unique problem. ^{Footnote 26} It is thus no wonder that cases that comply with the majoritarian default depiction fall outside FBA law. In fact, conscious ignorance precludes avoidance. A party who “is aware, at the time the contract is made, that he has only limited knowledge … but treats his limited knowledge as sufficient,” cannot avoid his contractual liability. ^{Footnote 27}

3. Internal Critique

Moreover, and now we shift to the second pitfall of the majoritarian default account, if indeed FBA cases were to be analyzed as mundane instances of contractual gaps that should be filled in a way that maximizes the contractual surplus, then FBA doctrines would have been wholly inadequate. More specifically, if the standard economic assumption of conscious ignorance is valid, George Triantis seems correct when arguing that FBA doctrines improperly disincentivize the ex ante allocation of FBA risks and should therefore be abrogated. ^{Footnote 28}

FBA doctrines, Triantis argues, present themselves as applied to unknown risks which the parties cannot allocate. But no such risk in fact exists. The reason for this seemingly surprising proposition is that risk can be either narrowly or broadly framed, and that framed broadly enough all risks are known. Thus, to take the familiar example of a shipping contract, ^{Footnote 29} narrowly framed risks, both known or unknown—say: an increase in fuel prices or the closing of a preferred shipping route—are subsumed under a broader framed risk that is surely considered, namely: an increase in overall fuel costs. More generally, all FBA risks, which are each narrowly framed, fall under the broad category of the risk that—for whatever reason—the cost of performance might increase or its benefits might decrease. Hence, “[w]hile an unknown risk cannot be priced and allocated specifically, it can be priced and allocated as part of the package of a more broadly framed risk.”Footnote ³⁰ Such packaging of unknown risks may admittedly lead to their inaccurate pricing, but “[t]here is no reason to believe that the failure to foresee is a particularly severe instance of this general phenomenon.” ^{Footnote 31}

Parties, to be sure, may deliberately choose to have some risks allocated ex post. But when they do so, they are likely to either pre-determine the allocation mechanism, or else rely on “extralegal norms that promote cooperation and deter opportunism in ex post adjustment negotiations.”Footnote ³² Neither alternative requires the application of the FBA doctrines. Finally, absent any conflicting indication, it seems unlikely to attribute to the parties an intention to delegate to courts the power to allocate ex post unknown risks given the courts’ comparative disadvantage in performing this task and the parties’ aversion to uncertainty. ^{Footnote 33} Therefore, all in all there is simply no scope or justification for the application of the FBA doctrines.

1. What Goes Without Saying

Contracting parties, writes Stephen Smith, “impliedly—but genuinely—stipulate that their agreement should not be binding in the case that a certain factual assumption turns out to be false.”Footnote ³⁶ Implied-in-fact terms are parts of the agreement not explicitly expressed by the parties, but nonetheless “implied by a court on the basis that they were implicitly agreed upon by the parties; they are terms that ‘go without saying’ in an agreement.” ^{Footnote 37} The FBA doctrines reflect such an implicit allocation: they are implied-in-fact terms that condition performance on the truthfulness of the failed assumption, so that the answer to the question whether such a failure allows for avoidance (or excuse) is governed solely and always by the parties’ tacit, but genuine, intent. ^{Footnote 38}

Although based on genuine intent, the implied-in-fact account does not require the parties’ to be aware of their (shared) assumptions or of the consequences of the failure of these assumptions. The reason for this is that communication is always grounded in objective (public) meaning, and this public basis makes meaning independent of the parties’ private intentions or consciousness. When interpreting agreements, it is the public meaning that is discovered. Thus, while implied terms reflect the parties’ intentions, they are (just like explicit terms) independent of their awareness or private thoughts. ^{Footnote 39} Still, for the implied-in-fact theory to work, agreements, properly interpreted, must have no gaps, so that there is no need to go beyond what they, explicitly or implicitly, prescribe. ^{Footnote 40} This means that “both parties must have shared a great deal”; and that an implied-in-fact FBA theory should point to “what it is that they share, and how it is that they could have come to share it.” ^{Footnote 41} Two main, not mutually exclusive, answers are offered to these questions: one is contextual; the other transactional.

2. The Contextual Answer

The first answer focuses on the broad context of the agreement, namely: the background customs, usages, and community standards in which it is situated. ^{Footnote 42} At time, relying on such public indicia is indeed helpful for uncovering what goes without saying. Unfortunately, it is typically beside the point in FBA cases. Customs, usages, and community standards are not randomly generated. They are public solutions to recurring problems, which emerge from people’s repeated prior experience. FBAs, by contrast, are prone to defy the conditions in which such solutions emerge. Because they are usually infrequent, FBAs—consider again the burned down music hall or the cow that turned out to be a breeder—are not the recurring problems that typically occupy the background public domain. ^{Footnote 43} Put differently, a risk dealt with by a community standard is unlikely to give rise to an FBA case, because the very existence of such a standard implies that the risk is too common and unsurprising for an FBA claim to be plausible. ^{Footnote 44}

3. The Transactional Answer

The second answer to the implied-in-fact theory’s core inquiry escapes this difficulty by relying directly on the parties’ particular agreement; more specifically, on the internal logic or the nature of the particular contract at hand. FBA doctrines should apply, in Peter Benson’s view, when both parties “can reasonably be held to the implicit but affirmative assumption that the obligation to perform applies only if certain specific kinds of conditions or circumstances exist when performance is due.”Footnote ⁴⁵ In other words, when the failure of the assumption creates a “fundamental and qualitative divergence between the contractually contemplated performance and the actually feasible performance,” we can safely assume that “[t]he contract itself must transactionally, though implicitly, carve out these conditions and circumstances as necessary factors for performance.” ^{Footnote 46}

In some instances, this notion, that a ‘transactional necessity’ is an implied condition for performance, can produce a clear answer. Benson seems correct when commenting on the celebrated coronation case ^{Footnote 47} that “the contract as a whole can only be made sense of on the affirmative assumption that the procession will not be canceled outright on the scheduled date.” ^{Footnote 48} But oftentimes—consider once more the burned down music hall or the cow that turned out to be a breeder—all we can learn is that the parties haven’t entertain the thought of such unexpected divergence between their agreed-upon script and the conditions at the time of performance. As noted early on, this proposition in and of itself only represents the dilemma of FBA cases; it does not resolve it, because it tells us nothing about the parties’ intended allocation of the pertinent risk. ^{Footnote 49}

The problem is not merely that reasonable people may disagree, but rather that the parties’ transaction as such does not offer a non-arbitrary reason to prefer one interpretation over the other. ^{Footnote 50} One may seek to settle the matter by extending the factual inquiry beyond the parties’ agreement. For example, it may appear more plausible to argue that a term is absurd if it contradicts a long-standing industry standard. This, however, takes us back to the contextual answer whose inadequacy invited the transactional analysis in the first place. Neither, however, can square this circle. Rather than suppressing the normative underpinnings of FBA doctrines by mis-representing them as cases of mundane contract interpretation, contract theory should account for their own distinctive normative core.

1. Choice Theory

Our theory of failures of basic assumption follows from and relies upon the choice theory of contract, which one of us developed in recent years with Michael Heller.Footnote ⁵¹ We therefore start with a brief overview of choice theory’s main tenets. Like other modern liberal theories of contract, choice theory begins with the Lon Fuller and William Perdue’s challenge of the legitimacy of enforcing wholly-executory contracts: what can justify vindicating promisees’ expectation interest even where it departs from the harm principle or when the contract convention is inadvertently invoked?Footnote ⁵² Traditional liberal theories, which perceive private law as a domain of interpersonal independence, need to develop somewhat convoluted answers. Choice theory, by contrast, relies on a very different understanding of private law’s DNA, which dissolves much of the difficulty.

Private law, at least in a liberal setting, is about autonomy as self-determination. Given the significance of people’s interpersonal relationships to their autonomy, people’s fundamental right to self-authorship requires the state to create legal institutions that confer upon individuals the normative powers that are crucial for their ability to self-determine; as a major power-conferring institution, contract belongs to this category. The very same right applies also—although with very different effects—horizontally. We must all respect each other’s right to self-determination (and not only independence).

Thus situated, contract’s signature commitment—to vindicate the promisee’s expectation interest—becomes straightforward. The ability to develop protected expectations is what makes contract a crucial tool for planning, and thus for self-determination. Contract’s autonomy-enhancing services admittedly impose on promisors an extra interpersonal burden and an exposure to liability that goes beyond other people’s actual harm. But this burden, which requires putative promisors to apply some additional caution while making promises, squarely falls within the obligation of reciprocal respect for self-determination that underlies private law as a whole.

Choice theory’s core claim is that contract is both justified and best interpreted by reference to this autonomy-enhancing telos. Contract is, as Fried argues, “a kind of moral invention” exactly because it extends people’s reach in this way. ^{Footnote 53} By expanding the available repertoire of secure interpersonal planning engagements beyond the realm of close-knit interactions, contract law dramatically augments people’s ability to plan. In that, it makes a crucial contribution to their autonomy, because self-determination involves planning. People, to be sure, may change their plans, and autonomous persons must be entitled to do so. But having a set of plans arranged in a temporal sequence is typically key to the ability to carry out higher-order projects, namely: to self-determine.

This autonomy-enhancing function of contract depends on the reliability of contractual promises, which explains, as noted, why a contractual right is the right to expect, namely: why contract law does not merely protect promisees’ actual reliance. Moreover, because contract’s empowerment potential depends on people’s ability to count on the representations of others, an autonomy-enhancing view of contract implies that individuals may be required to satisfy promisees’ expectations even if they only inadvertently invoked the convention of contract with no subjective intention to be legally obligated. Promisees are justified in expecting promisors to submit themselves to the jurisdiction of contract law even in this context: this extra interpersonal burden of the so-called objective theory of contract is again the price each person pays so that the other with whom they interact can benefit from contract law’s potential to advance their self-determination.

This conception of contract entails three principles—addressing range, limit, and floor—that must guide contract law in a liberal society:

1. (1) Law should proactively facilitate the availability and viability of multiple contract types in each sphere of human endeavor.

2. (2) Contract law must respect the autonomy of a party’s future self, that is, it must take seriously the ability to re-write the story of one’s life.

3. (3) To justify coercive enforcement by the state, all contracts must comply with the demands of relational justice.

We cannot, and need not, fully explain these principles here. But a brief sketch of their features that guide our account of FBA doctrines is in place.

2. Proactive Facilitation

Core rules that govern the life of contracts from inception to breakdown all partake of the same autonomy-enhancing mission and thus follow these three principles. Thus, the first principle, of proactive facilitation, is manifested in the numerous doctrines that go beyond safeguarding the parties’ independence, seeking to empower people by expanding the scope of the co-operative engagements that may be conducive to their own future plans. The objective theory of contract, which we have just mentioned, is a good first example. Many theories of contract support the objective approach, but choice theory provides a particularly-secure justification. The canonical status of the objective approach is best explained by the qualitative difference between the rather limited autonomy-enhancing potential of a subjective theory of contract and the far more impressive potential of its objective counterpart.

Many further doctrinal features of contract law follow suit, including its characteristic supply of a variety of contract types, which (when properly implemented) generates an inventory of diverse frameworks for interpersonal interaction for people to choose from in each major sphere of contracting. But the most important feature of modern contract law for the purposes of this Article is its treatment of incomplete agreements.

While the traditional common law was hesitant to enforce incomplete agreements, modern law takes a diametrically opposite attitude. ^{Footnote 54} Contemporary contract law is not satisfied with providing enforcement services to parties who fully specify the terms of their engagement. To be sure, where the parties “intentionally and deliberately” do not incorporate in their agreements “readily available, verifiable terms,” courts correctly infer that they do not intend legal enforcement. ^{Footnote 55} But beyond this category, current law—both the Uniform Commercial Code (UCC) and the Restatement (Second) of Contracts ^{Footnote 56} —goes out of its way to facilitate transactions by offering defaults that can fill gaps, even regarding crucial aspects of a transaction, like price. ^{Footnote 57} A significant subset of the current contract law canon belongs to this category.

3. Future Self

Choice theory’s second animating principle concerns the autonomy of the parties’ future self, which stands at the core of our account of FBA doctrines. Self-determination requires that people have the right to write the story of their lives. As Michael Bratman explains, people are planning agents and planning agency implies “diachronic rationality constraints,” which means, in turn, that people’s “prior intentions provide a rational default for present deliberation.” ^{Footnote 58} A liberal law follows suit. It offers people the normative power to make contractual commitments, and it properly assumes that insofar that these commitments are indeed part of the current self’s plan, the future self is presumed to adhere to them.Footnote ⁵⁹

But self-determination also requires that people have the right to re-write the story of their lives. The inter-temporal constancy that planning agency requires needs to be, in other words, sensitive to the fact that “sometimes an agent supposes there are conclusive reasons for change.”Footnote ⁶⁰ While new “ordinary desires and preferences” may not suffice, the constancy that planning agency implies should nonetheless be “defeasible constancy: constancy in the absence of supposed conclusive reason for an alternative.” ^{Footnote 61}

This is why a liberal law, which offers people the normative power to make contractual commitments so as to enhance their autonomy, cannot fully ignore the impact of such contracts on their future selves. ^{Footnote 62} While enhancing people’s autonomy in their capacity as promisees requires, as noted, to vindicate their expectations (and not only reliance), respecting their autonomy in their capacity as promisors implies that contract law must be particularly careful in defining the scope of the obligations it enforces and in circumscribing their implications, so as to allow the required space for the defeasibility of their inter-temporal constancy.Footnote ⁶³

This seemingly simple statement encapsulates one of the most difficult challenges to an autonomy-enhancing contract law. Since any act of self-authorship constrains the future self, the state’s obligation to enhance autonomy implies that contract law must both bolster and limit people’s ability to commit. This is a subtle task, and there is no easy formula for resolving this difficulty. But this does not mean that it necessarily leads to an impasse, nor does it imply that its resolution needs to be done on an ad hoc basis. Instead, liberal contract law can and should apply qualitative judgments and identify categories of limitations on promisors’ freedom to change their minds—think, for example, about employee non-compete agreements—that should not be enforceable (in general or under certain conditions) because they overly undermine the autonomy of their future selves.

Even more fundamentally, law should be particularly vigilant in ensuring that contractual liability does not attach in categories of cases where contractual commitments actually do not significantly serve the parties’ current selves. Categories of commitment that are not autonomy-enhancing to people’s current selves should not be used to constrain their future selves. ^{Footnote 64} The mission is, as usual, to find the system that is as conducive as practicable to enhancing people’s autonomy.

4. Relational Justice

This concern with the future self focuses on accommodating the inter-temporal autonomy demands of the parties intra-personally. The third, and final, animating principle of liberal contract law shifts gears to the inter-personal dimension, but its constitutive status is similar. Liberal contract’s requirement of relational justice—of reciprocal respect for self-determination—arises from people’s foundational right of self-determination, the same right that underlies the legitimacy of contract in the first instance.

This means that when one relies on contract law, that party is also necessarily undertaking the obligation to respect the other party’s self-determination. Thus, people’s use of contract law’s empowering potential should be limited to interactions that comply with the prescription of reciprocal respect for self-determination. This obligation of respect cannot be too onerous, but neither is it limited to a negative duty of non-interference—think for example about contract law’s careful, but important, deviations from the laissez faire mode of regulating the parties’ bargaining process. Similar effect applies regarding the law governing the contractual rules of the game, epitomized by the duty of good faith and fair dealing, which protect the parties against the heightened interpersonal vulnerability that contract performance engenders and solidify a conception of contract as a cooperative venture. ^{Footnote 65}

1. Two Difficult Cases

Examining the status of an agreement which turns out to be based on a failed basic assumption of both parties requires to focus on liberal contract’s second principle, dealing with the autonomy of the future self. To see why FBAs are easy cases from this perspective, it is helpful to compare them to other typical categories that implicate this principle.

Some of the cases in which law needs to address the competing autonomy requirements of the current self and the future self are complicated because they involve interpersonal autonomy claims. A case in point comes from the law of unilateral mistakes. Where only the basic assumption of one party fails, liberal contract’s commitment to promote both parties’ autonomy prescribes that law should also take seriously the other party’s claim to be able to carry out their own plan, which the agreement does reflect (and always has reflected). Thus, in unilateral mistake cases contract law needs to decide not only how to accommodate the autonomy concerns of the current and future self of the mistaken party, but also whether it is just to impose, in the name of the mistaken party’s future self, (some of) the consequences of the error on the other party, although they were not aware of the mistake, let alone caused or contributed to it. ^{Footnote 66}

But even cases that do not implicate considerations of interpersonal justice are typically more difficult than FBAs, because they often raise dramatic clashes between the autonomy claims of the current self and those of the future self. Think about employee non-compete agreements, which have become endemic in recent years, and focus on those that are not interpersonally abusive. Many of these agreements come about where the current self plots a plan that is genuinely empowering—the employee not only earns more, but also gains upgraded skills that may open up new professional horizons. Nonetheless, where the quid pro quo is a significant encumbrance of the future self, even these agreements may be subject to critical scrutiny: liberal contract cannot remain agnostic towards severe limitations of the ability of the employee’s future self to rewrite the story of their life. ^{Footnote 67} These are genuinely hard cases, because safeguarding the future self’s right to rewrite their life story implies that law limits the empowering potential that contract could have generated for the current self. ^{Footnote 68}

The existing doctrine governing non-competes is complex and varies across jurisdictionsFootnote ⁶⁹ and this is not the occasion for its analysis. The only observation that is pertinent for our purposes is that cases of failure of the basic assumption of both parties are much easier. Here, respecting the autonomy of the future self to be free from the encumbrance embedded in the agreement does not, by definition, compete with the self-determination of a current self.

2. FBA Cases Are Easy

In FBA cases, the current selves of both parties committed their future selves to perform the script that the agreement articulates based on an implicit assumption, but this assumption has failed. This means that this particular script was actually not part of either party’s future plan; that it deviates from what they both perceived as a feature of the future as each one of them intended it to be; and that ensuring each party that they will not be subject to the script if its basic assumption turns out to fail does not discourage the other from undertaking their commitment (quite the contrary). ^{Footnote 70}

Because a refusal to enforce such a script does not impinge upon the self-determination of the current self of either party, it does not limit, let alone threaten, contract’s empowering potential. This is why we claim that insofar as the first question is concerned, cases of an error of both parties “as to a basic assumption on which [they] made the contract,”Footnote ⁷¹ or of “a supervening event”Footnote ⁷² the non-occurrence of which has been “a ‘basic assumption’ on which both parties made the contract,” ^{Footnote 73} are indeed easy. ^{Footnote 74} FBA cases do not invoke the autonomy-based prescription to support agents’ inter-temporal constancy. Therefore, they do not raise even a presumptive reason to disrespect the updated choice of a promisor who has changed their mind. Allowing such a promisor to repudiate their contractual commitment where the shared basic assumption fails does not interfere with the promisee’s planning agency. Rather, it only ensures that the application of contact law’s coercive power is properly aligned to its autonomy-enhancing mission.

3. Neither Miscalculation Nor Misprediction

This last proposition, however, is overly broad and its scope should be doubly refined. First, we need to clarify that a basic assumption that eventually fails is very different from both a miscalculation and a misprediction.Footnote ⁷⁵ Contract’s autonomy-enhancing services empower people to make choices, and where the chooser miscalculates or mispredicts, their choice triggers regret. But respecting people’s autonomy implies that they are generally responsible for such bad choices, which they could have avoided. Liberal contract law need not be moved by sheer regret and is rightly reluctant to protect people from this type of choices. ^{Footnote 76} For an autonomy-based contract law, paternalist doctrines and policies, which substitute people’s judgment, circumvent their will, and thereby express disrespect for their autonomous agency, are generally impermissible.Footnote ⁷⁷

Liberal contract’s concern for the autonomy of the future self is by no means paternalist; it does not disrespect people’s autonomy. To see why, recall that FBA cases do not involve consciousness of alternatives of either party, but rather their tacit assumption. Ordinary living necessarily relies on such tacit assumptions, which people need not—indeed, if they are to properly plan and self-determine, should not—constantly challenge. FBA cases deal with errors about these types of assumptions, which one cannot expect oneself or others to avoid or protect themselves from. Therefore, absolving people from the liability to comply with agreements whose basic assumption fail does not override their judgment or their will. Quite the contrary: setting aside this type of impediments that people’s current commitments pose to their future ability to rewrite their life-story vindicates the autonomy of both the current and the future self. ^{Footnote 78}

The tacit basic assumptions, which accompany ordinary living, are deeply embedded in the background conventions that govern life in a given time and place. Their deep embeddedness explains both why they direct our lives and how they do so with no conscious deliberation. Their embeddedness in prevalent conventions, in turn, imply that the distinction between a ‘miscalculated’ agreement and one whose basic assumption failed does not require an essentialist inquiry of agreements’ metaphysical essences. Rather, it springs from the way agreements are customarily categorized and understood within a certain community at a given time and place.

Notice that the conventional aspect of FBA cases does not go as far as champions of the implied-in-fact terms account take it. As we’ve argued, in and of themselves basic assumptions cannot prescribe the pertinent legal rule. Accordingly, the role of the conventions that inform the parties’ basic assumptions in our account is much more limited: they only point to the type of agreements, which should not, as such, bound the future self. More specifically, the conventional background of the parties’ interaction provides the data needed in order to apply the normative prescription that delineates the normative power of current commitments to encumber future selves in line with their contribution to the parties’ self-determination. Appreciating this conventional aspect of FBA cases helps explain the second refinement of our conclusion, to which we now turn.

4. Opting Out

The fact that in making a certain type of transaction people ordinarily have a certain tacit assumption by no means imply that specific parties who contemplate a transaction of that type should be disabled from transcending this assumption. Unlike agreements that purport to excessively encumber the autonomy of the future self (such as the hard cases of non-compete doctrine), FBA cases do not typically push the limit of the current self’s legitimate authority over the future self that liberal contract can authorize. Therefore, parties should be, and indeed are, able to expand the scope of their mutual obligation beyond the conventional scope of similar transactions.

This means that while the prescription that the parties are not bound by an agreement whose basic assumption failed as it stands is immutable, the parties can nonetheless affect its incidents. Thus, on the one hand, this prescription is immutable because it relies on contract’s autonomy-enhancing telos, rather than the presumed intent of either the particular parties or of most parties. If contract is to serve people’s self-determination, contract law must comply with this first aspect of our FBA theory. (This may be the most fundamental feature which separates our theory from both the implied-in-fact and the majoritarian-default accounts.) But, on the other hand, contract’s liberal telos does not, and should not, imply that the parties have no control over the scope of their agreement. Quite the contrary, once it is clear that the parties in fact intend their joint undertaking to apply beyond its conventional scope, that scope no longer represents their tacit basic assumption.

Another way to put this point is to say that the particular instantiations of FBA doctrines—like the particular rules that derive from the (immutable) duty of good faith—take the form of normative defaults.Footnote ⁷⁹ Normative defaults are chosen for their freestanding value, and the contracting parties can overrule them only if they use “apt and certain words.”Footnote ⁸⁰

5. Three Guidelines

Our analysis thus far can be translated into three doctrinal guidelines, which help to identify the circumstances in which a failed assumption implies that performing the parties’ original agreement—their co-authored script as contemplated at formation—does not serve the self-determination of either party, so that its enforcement cannot be justified:

1. (1) The failed assumption must indicate that the agreement ill-fits the joint project to which both parties committed their future selves. This means that FBA doctrines apply to assumptions that inform the raison d’être of the parties’ joint plan; that the error must refer to the essence of the contract, rather than to any peripheral or collateral matter.

2. (2) FBA doctrines apply only to assumptions whose truthfulness was taken for granted, which the parties could not be expected to avoid or protect against. They do not cover cases where the risk of error was allocated, nor do they target failed assumptions whose truthfulness was in doubt.

3. (3) Both the first and the second guidelines just noted imply that a change in value per se—unexpected costs or benefits—does not qualify as an FBA.

1. The Task

A liberal contract law is committed to carefully scrutinize the impediments which people’s current autonomy-enhancing commitments pose to their future ability to rewrite their life-story. Therefore, as long as contractual parties do not signal that they intend their agreement to apply beyond the scope of what its conventionalist basic assumptions imply, this agreement cannot be a proper object for contractual liability. Thus, if the concern for the future self would have exhausted the normative guidelines of an autonomy-based contract theory, we would have had to subscribe to Fried’s disappointing conclusion, in which any further prescription is necessarily external to contract. A genuinely liberal contract law, however, resists this answer to our second question, not only for the reasons we’ve canvassed while discussing Fried’s account, but also—and even more significantly—because an external answer fails to deliver on the very core commitment of liberal contract itself.

It is one thing to refuse to enforce a parties’ agreement whose basic assumption failed. It is quite another to ignore the fact of that agreement. To live up to its autonomy-enhancing telos, contract law cannot contend itself with the supply of enforcement services to fully articulated agreements, which is why liberal contract’s first principle is one of proactive facilitation. As we’ve seen, for modern contract law some indefiniteness is not a reason (or an excuse) to take a hands-off posture and leave the parties to their own devices. Liberal contract law takes seriously its commitment to enhance the parties’ ability to employ contracts in the service of their self-determination. It is thus willing to go out of its way to fill gaps—including quite significant ones—as long as the parties’ intent to be legally bound is clear. ^{Footnote 81}

The very same analysis that guides law’s gap-filling apparatus explains why liberal contract law should not ignore the parties’ attempt to articulate a joint plan in FBA cases. That attempt, we now know, failed, and therefore their agreement as such cannot stand. But this does not mean that nothing was done, nor does it imply that the parties’ engagement with a clear intent to be legally bound (albeit not, of course, in that particular agreement) bears no legal implications.

2. Analogous Cases

To see how this can be possible, consider further modern contract law’s resolve to relax the indefiniteness doctrine as long as “the parties have intended to make a contract and there is a reasonably certain basis for giving an appropriate remedy.” ^{Footnote 82} This autonomy-enhancing disposition generated quite far-reaching doctrinal innovations. It allowed contract law to accommodate relational contracts—think, for example, about exclusive dealings, output, and requirement contracts ^{Footnote 83} —in which the parties set up a framework for their long-term on-going and dynamic future engagements. It also brought about the gradual recognition of what is known by now as ‘Type II preliminary agreements’, namely: preliminary agreements that do not reflect “a meeting of the mind on all the issues perceived to require negotiation”—and therefore do not bind the parties “to their ultimate contractual objective”Footnote ⁸⁴ —but are nonetheless not legally meaningless. Rather, Type II preliminary agreements are binding “to a certain degree,” committing the parties “to the obligation to negotiate the open issues in good faith in an attempt to reach the objective within the agreed framework.” ^{Footnote 85}

The same impetus underlies the laudable ambition of §2-207 of the UCC to develop alternative formation technologies, where the traditional approach to contract formation faces difficulties in empowering both parties in a mutually beneficial way. ^{Footnote 86} The pertinent formation route for our purposes is §2-207(3), which applies where no contract can be said to be formed within the other routes, including that of implied-in-fact. Faithful to the principle of proactive facilitation, the UCC does not always give up even in such dire circumstances. Rather, it prescribes that in these hard cases “[c]onduct by both parties which recognizes the existence of a contract is sufficient to establish a contract for sale,” and that the terms of the contract would include the terms upon which the parties agreed “together with any supplementary terms incorporated under any other provisions of this Act,” as necessary to fill in the remaining gaps.

3. What Follows an FBA?

A genuinely liberal contract law should take a similar approach to the predicament of contracts whose basic assumption failed. As with these analogous cases, this is by no means an easy task. But it is not an impossible one; and it can and should be guided by the principles animating liberal contract. Indeed, while liberal contract’s second principle as per the autonomy of the contracting parties’ future selves determines the scope of the FBA doctrines, the significance of the parties’ failed attempt to articulate a joint plan triggers liberal contract’s two other principles. Law should proactively facilitate the parties’ contracting efforts, while ensuring compliance with relational justice.

Thus, at times, the failure of both parties’ basic assumption does not materially change their joint plan, so that an empowering contract law can use their original script notwithstanding its deficiency. In some other cases, where the original script is largely useless, the remaining framework, loose as it indeed is, can nonetheless be filled in a way that is reminiscent of the cases mentioned above. The gap-filling inquiry in cases of material change focuses on what seems reasonable in the circumstances, which would oftentimes sensibly rely on the choices most parties in similar circumstances would have made. But notice that this inquiry is still very different from the one proposed by the majoritarian default account of FBA cases. It is not employed for answering the question of whether FBAs leave the parties’ agreement intact or not. That inquiry is resolved, as the previous section clarifies, in reliance on liberal contract’s immutable principle of concern for the future self. By contrast, the reference to the presumed intent of the parties or to other sources of norms to fill the gaps that typify FBA cases is strictly limited to the second stage of FBA analysis.

Finally, even where gaps cannot be filled along these lines, contract law need not turn to external normative resources. Relational justice, as may be recalled, must guide the parties’ interpersonal interactions in and around contracts (including for the regulation of the precontractual stage). The duty of good faith, which stands, as noted, at the core of relational justice in contract, seems particularly informative for addressing hard FBA cases.

4. Three Guidelines

This means that liberal contract’s normative commitments yield three doctrinal guidelines for determining FBAs’ consequences:

1. (1) Avoidance should only be allowed when an FBA indeed undermines the shared plan outlined in the parties’ script. By contrast, where the effect of the FBA is immaterial to their shared plan, enforcement of the parties’ script serves their autonomy better than rescission or reformation.

2. (2) In other cases—where the FBA does undermine the parties’ script—contract law should allocate FBA risks according to what seems reasonable, which oftentimes follows the choices most parties in similar circumstances would have made.

3. (3) The law should refrain from either enforcing the parties’ script or granting rescission where doing so is relationally unjust.

1. A Contract’s Essence

The first guideline we offered for identifying FBA cases requires to determine whether the parties’ error refers to the essence of their contract. In that, we deliberately invoked the widely criticized ^{Footnote 87} holding of the Michigan Supreme Court that the sale of the cow Rose 2d of Aberlone can be rescinded due to Sherwood and Walker’s mutual mistake.

While Rose was with calf, and thus of great value, both parties supposed that it was barren, and it was therefore sold for “an insignificant sum as compared with her real value if a breeder.”Footnote ⁸⁸ This implies, the Court held, that this is not a case of “a difference or misapprehension” in “some quality or accident.”Footnote ⁸⁹ Rather, here the difference goes “to the whole substance of the agreement,” so that “the thing actually delivered or received is different in substance from the thing bargained for, and intended to be sold.”Footnote ⁹⁰ The mistake “went to the very nature of the thing”: Rose “was not in fact the animal, or the kind of animal, the defendants intended to sell or the plaintiff to buy,” and the parties “would not have made the contract of sale except upon the understanding and belief that she was incapable of breeding, and of no use as a cow.”Footnote ⁹¹ Because this assumption is not peripheral, but rather goes “to the root of the matter”—“A barren cow is substantially a different creature than a breeding one” —the sellers “had a right to rescind, and to refuse to deliver.”Footnote ⁹²

It is easy to ridicule Sherwood as a metaphysical inquiry as to the essence of a cow or a breeder, but whatever its author’s intention might have been, a more charitable reading befits our reconstructive agenda. For us, Sherwood stands for a test that looks at the conventions that inform the parties’ tacit assumptions. As with other doctrinal contexts, liberal contract law takes an objective approach, which relies on prevailing conventions. It examines the type of contract at hand, and more particularly the way actors in the relevant market typically understand the main purpose of this contract type. Since there were (so we understand) separate markets for barren cows and breeding ones, the assumption that Rose was barren can be safely deemed basic, and its failure amounts to an FBA.

Other courts’ decisions can further demonstrate the viability of such an analysis. ^{Footnote 93} Indeed, careful readers of some of these cases can even identify an almost explicit reference to the need for a conventionalist focus. (One familiar example comes out from the court’s discussion of the conventional wisdom of industry and government that the disposal of spent fuel would be affected by reprocessing, which was critical for assessing the dispute between Westinghouse and Florida. ^{Footnote 94} ) Nevertheless, explicitly recognizing the role of this conventionalist focus is still helpful. It can both clarify the law and limit the doctrine’s indeterminacy by grounding its gatekeeping test in the everyday experience, practices, and knowledge of the people engaged in the relevant industry. This may also encourage courts to develop rules of thumb that can further improve on the doctrine’s guidance.

* * *

What does this analysis mean for COVID-19 related litigation? Most parties to contracts formed before the virus began to spread did not consider the possibility of a global and lasting pandemic or the measures countries have taken (and are still taking) to contain it. Does this imply that the parties’ presupposition as per the absence of a pandemic is tantamount to a basic assumption? As the preceding analysis implies, the answer varies across contract types.

Take, for example, rental agreements,Footnote ⁹⁵ and focus first on residential ones. Renters, especially if they lost their job because of the crisis, may seek to be excused from the obligation to pay rent based on an FBA. We believe that people experiencing economic upheaval due to the crisis should be aided by the State; and we do not necessarily rule out the possibility that other contractual doctrines may be applicable. ^{Footnote 96} But we think that the FBA doctrines are not.

The reason is twofold. First, renters and landlords rarely share assumptions about renters’ financial abilities. Instead, they usually acknowledge the uncertainty and allocate the risk.Footnote ⁹⁷ Second, and more importantly, COVID-19 simply did not trigger an FBA in this type of contract. The joint project in residential rents is housing for money, and the virus did not change people’s need for a place to live or their ability to use the property for that purpose. COVID-19, that is, did not undermine the essence of residential rent agreements.

Commercial rents—for example, of a restaurant—are different. To be sure, like in residential rents, parties to commercial rents do not usually share assumptions about the renter’s financial ability or profits. But they do share the assumption—namely: they take for granted—that eating at restaurants is a socially acceptable behavior. When this stops being the case—for example, due to an imposed lockdown or because the virus caused our social habits to change—COVID-19 is deemed to have caused an FBA.Footnote ⁹⁸

2. Risk Allocation

Whereas our first guideline for delineating the scope of FBA law asks whether we are dealing with a basic assumption, the second examines whether what was undermined was indeed an assumption. Going into a contract, the parties hold various beliefs; but not all beliefs are shared assumptions. An assumption, as we’ve seen, is something taken for granted by the parties—not something that they contemplated, were aware of its uncertainty, and explicitly or implicitly allocated its risk. When the parties are aware that something is uncertain, proceeding with the agreement implies that they made the choice to bind their future selves despite the risk. Enhancing their autonomy in this case requires to respect their choice.

Existing doctrine by and large follows suit, respecting the parties’ risk allocation, both explicit and implicit.Footnote ⁹⁹ One classic category of cases regarding explicit allocations involves ‘as is’ and ‘force major’ clauses, which courts validate as a matter of course.Footnote ¹⁰⁰ Another particularly typical case of courts’ deference to the parties’ allocation of FBA risks involves settlement agreements. Settlements by their nature indicate the parties’ choice to allocate FBA risks, and courts are therefore reluctant to rescind them on FBA grounds.Footnote ¹⁰¹ As one court stated, “[p]ractically every settlement … involves the element of chance as to future consequences and developments. There are usually unknown and unknowable conditions … that may affect the ultimate recovery or failure of recovery. Mutual ignorance of their existence cannot constitute ‘mutual mistake.’”Footnote ¹⁰²

Risk allocation may also be implicit. This is the case where the truthfulness of the parties’ shared assumption was actually in doubt, that is: where they are both aware that they may be mistaken.Footnote ¹⁰³ It is also the case where a party has the opportunity to conduct the necessary due diligence, but fails to do so.Footnote ¹⁰⁴ Finally, the same conclusion should apply in cases like the (in)famous Alcoa case, involving sophisticated commercial parties, who employed experts to construct a price adjustment mechanism, which ultimately yielded surprising results.Footnote ¹⁰⁵ As critics correctly emphasize, the court should have understood that mechanism as indicating the allocation of the pertinent FBA risk, which means that the parties’ contract should have been enforced. ^{Footnote 106}

* * *

On its face, this risk allocation guideline may appear irrelevant to COVID-19 affected cases. After all, is it really likely that the parties considered and allocated the risk of a global pandemic and the extreme measures taken for its containment? Isn’t it obvious that parties took the non-occurrence of that risk for granted? Not necessarily, since conventional customs and practices may indicate an implicit allocation of the risk. Here too a conventionalist approach is in order. That is, to understand what risks the parties have implicitly allocated, we need to consider the risks that are salient to actors in the relevant market. One way to perform this task is to examine the insurance policies market actors typically procure and inquire which types of risks are covered, and especially which risks that are not covered are nonetheless made salient.

Take again the restaurant example. Commercial renters typically procure ‘business interruption insurance’ that covers renters’ lost profits. Does this indicate that the parties were aware of the relevant risk? As it turns out, business interruption insurance pertains mostly to lost revenue due to physical damage to the property. If this is indeed the case,Footnote ¹⁰⁷ then it is only this type of risk—and not lost profits due to the coronavirus crisis—that is made salient by the policy, and that, whether actually covered or not, can be assumed to have been allocated by the parties.

3. Change in Value

Finally, as noted, a change in value per se does not qualify as an FBA. This guideline, which is of obvious relevance to pandemic-related cases, previously informed sub-prime-crisis FBA cases in which courts persistently held that the mere fact that a contract has become less valuable does not constitute an FBA, even when the diminution of a contract’s value was caused by an unexpected economic crisis.Footnote ¹⁰⁸

1. Where No Material Effect

As noted at the outset, black letter law prescribes that if the FBA did not materially affect the exchanged considerations, the parties’ contract is reinstated notwithstanding an FBA. Our analysis suggests that the materiality requirement should turn on the effect of the pertinent FBA on the parties’ joint project, realizing that—although its basic assumption failed—when this effect is immaterial, effectuating the parties’ intent can be best achieved by reinstating the script they have jointly created.

Happily, some pertinent case law echoes this guideline, implying that an FBA is immaterial if it leaves the parties’ shared plan enshrined in their agreement more or less intact. Thus, while one promisor was allowed to rescind its contract where it turned out that a “right of vital importance” did not exist,Footnote ¹⁰⁹ another’s plea for excuse was denied where the court concluded that the FBA merely generated an economic loss without “destroy[ing] the purpose” of the agreement or making performance “vitally different from what the parties contemplated.”Footnote ¹¹⁰ This understanding of the materiality requirement ensures that only where the unexpected events indeed undermine the parties’ shared plan will the law fully discard it and turn to external sources for facilitating their failed contracting attempt.

* * *

This conclusion may be relevant to the COVID-19 litigation. To be sure, often, when COVID-19 undermined a basic assumption of the parties, it also generated a material effect on the exchanged considerations. But this is true only where the effects of the crisis were left unmitigated and may not be the case otherwise. Indeed, some of the measures taken by governments to mitigate the effects of COVID-19 change the analysis.

In the United States, for example, the Federal Paycheck Protection Program provides government assistance to businesses to cover their operating costs.Footnote ¹¹¹ The Program is pertinent here not because the government provides people with funds: as we repeatedly note, financial ability per se rarely factors in the analysis because parties seldom share assumptions about it. Instead, what is crucial is whether state funds are made available for the purpose of allowing the contractual relations to continue. Thus, if a business receives money in order to pay its operating costs, it can no longer argue that COVID-19 had a material effect on its rent agreement.

The flipside is that government assistance does not always negate the material effect of COVID-19. One example is car insurance. Parties to such agreements do not share assumptions about the insured’s use of the car. But, like with the restaurant example, they both assume that driving is a socially acceptable behavior. When this stops to be the case, as when a lockdown is imposed, an FBA has occurred, and its effect—leaving the insured party with no benefits—is material. This remains true even if the insured receives government assistance (e.g., unemployment pay). Because neither eligibility nor the program’s purpose hinges on maintaining these insurance contracts, such payments do not affect an insured’s FBA claim.

2. Reasonable Gap-Filling

Once this first bridge is crossed and the effect of an FBA on the exchanged considerations is deemed material, there is little left from the parties’ agreement to save. At this point, an autonomy-enhancing contract law should allocate that risk in a way that can best vindicate the parties’ reasonable expectations. ^{Footnote 112}

At times, such a reasonableness inquiry is quite straightforward, because the court can confidently allocate the risk in the way the contracting parties themselves would have done.Footnote ¹¹³ In other cases, where this route seems uninformative, proactively facilitating the parties’ contracting efforts implies to go beyond the specific parties. In these cases courts properly apply the majoritarian risk allocation which arguably conforms to the parties’ ex ante beliefs and best reflects their (hypothetical) choice of how to advance their joint project.Footnote ¹¹⁴

* * *

In many cases, a majoritarian allocation would require the performance of the script the parties have created or, conversely, excusing performance in its entirety. But the nature of the coronavirus crisis—its temporary immediate effects and uncertain long-term effects—implies that in some cases, an intermediary solution is required.

Consider the restaurant example one last time. Renters often invest a lot of money in renovating and adjusting the property to their specific needs and desires. Simply allowing them to terminate the agreement and walk away from the restaurant would be unhelpful and indeed frustrate, rather than advance, their expectations. Existing doctrine of temporary excuses and reformation, which allows inter-temporal as well as other forms of division of the pertinent risks, helps handling these more subtle FBA cases. ^{Footnote 115}

3. Relational Justice

It is apt to conclude with one of the most famous FBA cases, which nicely demonstrates the (limited) role of relational justice in our doctrine.Footnote ¹¹⁶ As noted, considerations of relational justice are triggered where one legal outcome—either enforcement or rescission—maintains the ability of both parties to achieve the goal for which they co-authored the shared script that failed, while the other undermines the goal of one party and provides a windfall to the other. A cooperative conception of contract implies that in such cases law should opt for the former alternative.

Thus, when Henry rented Krell’s suite to watch the coronation of Edward VII,Footnote ¹¹⁷ “Henry had not intended to insure Krell against the possibility of the coronation’s being postponed, since Krell could always relet the room, at the premium rental, for the coronation’s new date.”Footnote ¹¹⁸ In other words, the contract in Krell was justifiably rescinded because enforcement would have undermined Henry’s goal while providing Krell with the opportunity to receive the premium on two occasions, whereas rescission allowed each party to accomplish the original goal of their failed contract.Footnote ¹¹⁹

Indeed, a rule allowing rescission in this type of circumstances—that is, when the promisee can easily cover and the promisor did not assume the risk of the FBA—constitutes an attractive normative default. This rule can explain why a promisor is excused if the parties agreed on the sale of crops from a particular plot (or goods from a specific factory) and the crop failed (or the factory destroyed),Footnote ¹²⁰ but is not excused if the hardship was caused by an event that similarly affected the market as a whole.Footnote ¹²¹ In the former type of cases, the promisee can usually procure an alternative contract in similar terms, allowing both parties to accomplish their goals. By contrast, where the effect is market-wide, cover at the contact price would often be unavailable.Footnote ¹²²