What Justice Kagan Gets Wrong About Contracts in Sveen v. Melin

I cannot claim to be any kind of expert on constitutional law, and thus on the merits of the Court’s current approach to the Contracts Clause I don’t have a firm opinion.  However, I do have some opinions about contract law, and on those grounds, I have some bones to pick with Justice Kagan’s majority opinion in today’s decision in Sveen v. Melin.

The unacknowledged villain in the drama.

The case involves a Minnesota law that retroactively changes the beneficiaries of life insurance policies upon the divorce of the insured party, invalidating the designation of the insured’s now ex-spouse.  Justice Kagan and the rest of the Court save Justice Gorsuch concluded that the law does not “substantially impair” the obligation of contracts.  This is the part of the opinion that I don’t find compelling.

First, Justice Kagan argued that the Minnesota law doesn’t substantially impair the obligation of contracts because it produces the outcome that most parties would like.  There are a number of problems with this argument.  At the outset, it’s worth noting that it may just be wrong.  There are lots of reasons why an insured might intend to make an ex-spouse the beneficiary of a life insurance policy, for example because the ex-spouse paid part of the premiums.  (This seems to have been the case in Sveen v. Melin.)  The deeper problem with this argument is that it misconceives the nature of contractual obligations.  The point of contract law isn’t to effectuate the intentions of the parties.  It is the effectuate their agreements.  What matters in a life insurance policy is what the parties agree to not what they subjectively intend.  Not only does the law of contracts not recognize the intentions of the parties as legally binding, the parole evidence rule would prohibit a court from even considering evidence that the insured’s intent diverged from the written terms of the contract.

It is true that when considering how to fill gaps in contracts, courts will resort to assumptions about what most parties would have intended had they considered the matter.  However, this isn’t always the case.  Sometimes courts adopt penalty default rules that deliberately frustrate presumed intentions in order to force parties to be more explicit in their agreements.  Examples include the rule in Hadley v. Baxendale and the principle of contra preferendum.  More importantly, the theory of default rules is inapplicable to the facts in Sveen v. Melin.  There was no gap in this contract. Rather the contract explicitly dealt with the question of beneficiaries.

A more applicable analogy from the law of contracts would be the defense of frustration of purpose rather than the idea of a gap filler.  Here the law of contracts does allow legal liability to vary from the explicit agreement of the parties in part based on assumptions about what they would have intended had they considered the question.  However, the facts in Sveen v. Melin don’t come even close to raising a question of frustration of purpose.  Restatement (Second) of Contracts §266(2) says:

Where, at the time a contract is made, a party’s principal purpose is substantially frustrated without his fault by a fact of which he has no reason to know and the non-existence of which is a basic assumption on which the contract is made, no duty of that party to render performance arises, unless the language or circumstances indicate the contrary.

In this case, divorce cannot be said to be “a fact of which [the ensured] has no reason to know.”  Many marriages end with divorce.  It’s not unforeseeable.  (It’s also not clear that the failure of the marriage was without fault on the part of the ensured. Maybe he was a philandering jerk.)  The doctrinal issue gets a bit tangled here because the ex-spouse is a third-party beneficiary to the contract rather than a party, as are the contingent beneficiaries who claimed the benefit of the Minnesota law.  However, as an analogy to support Justice Kagan’s theory that the “real” obligation of the contract is what the party would have intended, frustration of purpose doesn’t hold water.  The Minnesota law goes well beyond what the law of contracts proper would allow you to claim.

My second bone is Justice Kagan’s dismissive approach to the distinction between contractual obligations and contractual remedies.  A number of the Court’s earlier precedents blessed state laws the made certain contractual provisions unenforceable.  The challenger tried to distinguish these cases by arguing that they went to the issue of remedies rather than the obligation of the contracts proper.  Without claiming any expertise in the Contracts Clause case law, I’d note that some of these cases seem to have to do with the validity of unrecorded deeds.  This, strictly speaking, isn’t a matter of contract law but of property law.  If I promise to sell you land in return for money and someone else ends up with title to the land because of a new recording statute, it is perfectly reasonable to say that the contract against me remains valid even though you don’t get the land.  Your remedy against me will be limited to money damages, but the contract will still be valid.  Indeed, if I am a fraudster selling the same parcel of land to multiple people, the fact that the law must choose which of my victims gets title shouldn’t have any impact of the ability of the victims to sue on the contract.  Why limit victims to a restitution or tort remedy, for example, in a rising market where the value of the performed contract would have been higher?

I’d also point out that the law of contracts itself makes a distinction between liabilities and remedies.  Drawing on the incomplete contracts literature from economics, it’s common for law professors to claim that all remedies are simply default rules.  This, however, isn’t an accurate statement of actual contract doctrine.  The most obvious example is the availability of specific performance: Parties cannot contract for specific performance to be their remedy.  The unenforceability of penalty clauses would be another example.

At a deeper level, the refusal to draw a distinction between obligation and remedies is just sloppy Holmesianism, and nobody wants that.  Holmes famously declared that the obligation to keep a contract means nothing more than the option to perform or to breach and pay damages.  In other words, contract law is entirely a matter of predicting how the machinery of the state will operate in contract litigation.  This kind of a Realism, however, cannot be accepted as an adequate theory of contract law.  First, as a doctrinal matter it does not describe the law as it actually exists.  For example, performance of a contract cannot be consideration on a new contract under the pre-existing duty rule precisely because the law doesn’t treat contracts as creating options priced by damages but rather as creating obligations.  At a deeper level, the Holmesian position ignores the internal perspective of the law.  Contract law as a social practice understood from within is about obligations, wrongs, and remedies for wrongs.  These are concepts with their own internal logic, a logic that cannot be reduced to a clumsy way of making predictions about judicial behavior.

What I find frustrating is that often when the Court faces private law issues, it falls back on a kind of crude Realism, even when it would never take the same jurisprudential approach to matters of constitutional law or federal statutory interpretation.  There is no reason that it’s thinking on common law questions should be held hostage by a bad theory of law from more than a century ago.