NARRATOR: Thanks for joining this episode of the No. 86 lecture series, in which Professor Richard Epstein discusses the Roman Law of Contracts. In Episode 3, Professor Epstein explains: The definition and types of good faith contracts The factor of risk Contracts of sale Contracts of hire Contracts of partnership This lecture is part of a series with Professor Epstein on how this ancient legal system can provide crucial insights about modern problems. Professor Epstein is one of the most prominent legal scholars of our day. He is the inaugural Laurence A. Tisch Professor of Law at NYU School of Law, a Senior Fellow at the Hoover Institution, and Professor of Law Emeritus and a senior lecturer at the University of Chicago. As always, the Federalist Society takes no position on particular legal or public policy issues; all expressions of opinion are those of the speaker. PUBLIUS: What are good-faith contracts? How do they differ from other types of contracts? RICHARD EPSTEIN: Now what we do is we turn to contracts of sale, contracts of hire, contracts of partnership, and contracts of agency, which are all regarded as good-faith arrangements. And the reason for that is these obligations are generally bi-lateral in one form or another. The sequence of performance matters. And so if I'm supposed to do something after you do something and you don't do the something you're supposed to do, well, what kind of adjustment should be made on my end? And constantly, throughout these arrangements, the principle of good faith is invoked to ask people to take those options which, given the way the situation is opened up, maximizes the overall welfare of both parties to the particular transaction. And it sounds somewhat vague in the abstract, but if you actually start going through particular cases on how this stuff works, what you can see is the real kind of sophistication associated with the Roman law. And as ever, what you first do is you discuss the paradigmatic cases in which things start to work. And then what you start to do is you go to situations in which something intervenes, which means that the normal course of performance on either or both sides is not going to be honored. Now the contract of sale is probably the single-most important commercial contract, and its simplest form essentially it involves a case in which somebody has land or a particular thing to which they have outright ownership and what they do is, either by formalities or by simple transfer, is make the possession of that thing go over to somebody else who also essentially now has the ownership rights with respect to the situation. And in the simplest case, these are simultaneous transaction. And so what happens is the goods are delivered on the one side, and the payments are made on the other side. At that point, the former owner of the goods is just a stranger to the particular transaction, and the fellow who is paid the money can kiss his cash goodbye, but essentially is not the outright owner of the thing in question. So we like all of those kinds of arrangements because what happens is sale, essentially, is the paradigmatic case in which the transaction works for mutual advantage of both parties. The guy who sells prefers to get the money to the thing. The guy who buys prefers to get the thing to the money. So when you're trying to figure out sales, well, the first question is what do you do with respect to formal information? And this is not an easy question. You could actually require these contracts be in writing on both sides, and indeed, under modern law of the statute of frauds, if the amount that is to be transferred is above a certain amount, we uniformly require a writing requirement. When it comes to real estate, either a sale or a long lease, it's absolutely de rigueur that these things be done in writing and nobody wants the situation to be otherwise because the formalities let you know when the negotiation has stopped and when the serious transactions are already over. And so we have those kinds of arrangements. But in certain kinds of sales for goods, it sometimes becomes very difficult to do. And one of the great questions that you had is to worry about the question of paying either arra as the Romans called it, or earnest in some form or another. And so there's an oral contract for sale, somebody may say, "The only time that this thing is gonna become enforceable is if the buyer manages to give some money to the seller to bind the deal. If the deal doesn't go forward, then the seller keeps the money as liquidated damages, a particular sum of damages for the home in question. And if it turns out it's the seller who breaches this particular arrangement, then he has to pay the arra back and pay double for that particular situation." And there is some evidence in Roman law that was required in some transactions at some time, but the basic intuition in most cases with these things were purely consensual and fully executory so that no formalities were needed. And when we say that this thing was fully executory, it means that even if you haven't performed, you're entitled to recover, subject to the rules that I've mentioned before, that you have to be prepared to tender either the cash or the goods as the case may be in order to make the particular relationship work. One of the things that they often said under these circumstances is that the price had to be certain. The question is why would you want to have a requirement like that? And the answer, again, is the same that we talked about with respect to loans. If you don't know exactly what the price is going to be under these particular transactions, then how do you decide on whether or not something is to be done? So if I'm supposed to deliver the goods and I can't figure out how much I'm supposed to recover under these situation, it turns out it's a genuine commercial conundrum, so certainty is then going to be required so that when you get within the legal framework, each side knows its respective rights vis-a-vis the others. But what do we mean when we start to talk about certainty then becomes an interesting question. And the rule under Roman law is the correct law, which says A, it could be either the price which is designated, 100 sesterces and so forth, or there can be a formula which says, "The price for these particular goods will be the amount that gold trades for tomorrow on the stock exchange times 50." And the theory is, there's a particular price that happens for the exchange of gold, and we know how to multiply by 50, so long as we can do only mathematical computations under these circumstances, it's gonna be relatively easy to do it. Why would people want to have this kind of component? Well, it may turn out that these are goods that are purchased for resale, and movements in one particular market may tell you what the fair price is going to be. And so you allow flexibility, so long as it doesn't create any kinds of administrative complication. Well, then somebody says, "Can we go further than this?" And the third example that you get in Roman law is a situation where the price will be determined by an impartial arbitrator who will pick a number one way or the other. And now it starts to get a little bit more dicey because you're not just doing mathematics, now you have to rely on this third party. And so you've got to worry about the easy case, which is the arbitrator sits there, somebody skilled in the business, and he says, "In my judgment, the price ought to be 75," and everybody says, "Amen, brother," and they go ahead with the deal. But if it turns out that the arbitrator may have a bias one way or another, he may either raise the price too much or lower the thing too much, and at this particular point you don't have a ruler anymore. What you do is you'll have a law school over the bona fides of your third-party party. To some cases, people may be willing to take this particular risk only to rue it later, so you may not want to rule it out as a matter of course. But generally speaking, you're gonna be reluctant to do it at all. And then there's, of course, the other situation where what's going to happen if it turns out that the third party is either disabled or refuses to name a price. Now the whole deal can start to crater. And so what happens is, generally speaking, people are usually very, very reluctant under these circumstances to create a situation where you put your hands in the discretion of some kind of a third party. PUBLIUS: What about other risks that don’t necessarily involve third parties? RICHARD EPSTEIN: These are business risks which are as much today as they were in earlier times. You still allow the contract, but you advise people, generally speaking, that they don't want to get themselves involved in these kinds of relationships. What you want to do, typically, is fixed price or fixed formula about the way the thing is so that when you get to the enforcement stage, what you do is reduce all of the burdens that are gonna be placed upon the decider on how it is that these things will start to operate. Well, then the question is on the other side, "Well, what is the thing that you're selling?" And it turns out that this itself is not always so obvious. So let's just take a couple of cases. The first thing that you say is, "I hereby agree to sell you this boat which is in Rome harbor." Rome doesn't have a harbor, make believe that it did. So you know what the boat is and they do, and you agree to sell the boat only to discover after the contract turns out to be formed, that the boat has been destroyed be fires two days before its formation. And now you have a very serious problem. When does the risk of loss shift between the buyer and the seller? And the usual rule under Roman law, which has fallen under the common law, is that if the destruction of the thing takes place before the formation of the contract, the mutual error of both parties with respect to existence means that the whole deal is off and why is it that one tends to like that kind of rule? Because what you have to ask yourself is what's the social gain that you get by allowing an enforcement action one way or another in the event of this innocent destruction that has taken place beforehand? If it turned out that you thought that there was some reason to give an action and order to ensure that the seller's gonna take suitable care of the thing in question, there'd be an efficiency gain. But if this thing was struck by lightning or destroyed by brigands of one form or another, it's not as though you think that there's something that the seller did which was out of whack, and so generally speaking you're gonna save the administrative cost associated with a particular action unless you can show how that action is going to shape contract or conduct in a respectable way of the various parties. And so what we do is we now have this particular doctrine called fundamental mistake with respect to the existence of a thing. But like all doctrines, this thing then starts to become more complicated. And so then what you do is you have the mistake not to the existence of the particular thing, but rather with respect to its essential qualities in one way or another. The Romans called this the doctrine of error in substantia, a meaning in effect to take the simplest case. Suppose you think that there's a bar out there in an ingot which is gold and you're willing to price in on that basis, but in fact it's lead over which there is a very thin layer of gold foil that has been painted on. If both sides are ignorant of the situation, is this error large enough so that you're going to void the particular contract in question? And this one becomes much more difficult to deal with than the first one because there's always the answer to say back, "Well, the buyer is looking at this ingot, it's not sitting in a harbor 500 miles away. If he wants to test it out and inspect it, he can do so." And so immediately it's against the fundamental doctrine of mistake. Somebody says that this is really a question of risk allocation under contract, and you could alter the price depending upon whether the risk of purity or not purity is gonna be on this party or on that particular party. But typically, people don't even think about these things. And so what the Romans were prepared to do is in cases of enormous deviations to allow you to walk out of the contract in the case of these mistakes. But if it turned out that the difference was between say 14-karat gold and 18-karat gold, generally speaking under those circumstances they would be more likely to keep you to this arrangement. The moment you think about this, what you realize is that the default rules are not very good no matter which way you do it. And so what legal systems tend to develop under these circumstances are rules for the inspection and testing of things so that the quality dimension is going to be resolved before the transaction takes place. And this is very common, for example, in wine-type situations, where what you do is you taste a representative sample before you go forward with the deal, and then if it turns out the whole happens to correspond with the sample, a contract is on. If the whole turns out to be systematically inferior to the sample, then it turns out that you could back out of the contract. Are there things about that that you can do? PUBLIUS: What about risks that a seller specifically faces? RICHARD EPSTEIN: And the next kind of problem that one starts to have in these things is what does it mean to sell a thing? And I've already indicated to you that non-existent stuff raises this problem, but there is this famous illustration in Roman law about the distinction between an “emptio rei speratae” and an “emptio spei”. And one of these things, the emptio rei speratae] means basically the promise of an expected thing, and the other is a purchase of an expectation. And the way in which this problem tends to arise in this famous text is what you have a fisherman who is casting a net and what happens is sometimes the net comes up empty, sometimes it comes up very full, sometimes it comes up somewhere in between. And so the question that you then have to worry about is who's gonna take the risk of a very bad and who's gonna get the benefit of a very good catch. And the way in which this thing works is if it turns out that what you're saying is that you were buying the emptio spei, it means that the risk is going to be on the buyer. He, then, is going to be in the situation, he buys the expectation, if things turn out very, very good, then he gets a bargain for a low price. If it's very bad, it turns out he comes home empty. And so the thing that's sold to avoid this problem is the expectation, the spei, that's a term for hope. But on the other hand, if you do it rei speratae, it means after the stuff comes in, and now all of the risk is on the seller rather than the buyer, and so if there's a small catch and you're selling these things on a per-piece basis, it turns out that it's gonna go the other way around. So now that the risk is on the seller rather than on the buyer, all of a sudden the price that you're going to have to pay is gonna move up to get that. This business about whether or not you're dealing with risk of one form or another is extremely common in every legal system. So as to give you the modern equivalent of that, we deal with horses, and the question about who's going to take the risk if it turns out that the insemination doesn't take, and who's gonna get the benefit if it turns out it does? And essentially, you can make your deals in any way that you want. For a very low price, what you can say is, "I want your wonderful steed to impregnate my mare." And if it fails, well, I'm gonna just have to buy again, at which point the price is gonna be relatively low. But if you want a guarantee of insemination, then all of a sudden the guy who has the steed or the stud is gonna inspect the mare to see whether or not it's fertile or not fertile because he doesn't want to waste time. And then, in effect, what happens is he's gonna charge more money because he has to take the risk that they're gonna be two or three of these things, and what you could then do is start with these pure cases, you can actually then change it a little bit. I'll say, "I'll tell you what we'll do is if this thing comes out and you reduce the fee, I'll give you one-third ownership in the horse after it comes out, and so what you can do is essentially make sure that instead of talking about these doctrines based upon frustration, rather upon mistake and so forth, you make them a contractual risk. The final variation on this is the situation where what you do is you make a contract for the sale of a boat or the sale of a particular thing, and it's in full existence at the time while that particular contract is made, and then that mythical fire or that mythical tornado or that mythical arsonist comes along and destroys the thing after the contract. Or it just is destroyed by accident. PUBLIUS: What happens then? Who assumes the cost? RICHARD EPSTEIN: And so the really tricky questions then arise. If there is a postponed delivery of a thing, and the destruction takes place while something is in the hands of a seller, does the risk pass to the buyer at the time of the contract formation, or does the risk pass only when the possession of the goods passes from one side to another? The Romans, on a theoretical level, said, " Well, ownership is passed res perit domino," a phrase I've already used, the thing perishes for its owner. And so even though it's in the possession of the seller still, and the buyer takes the risk. On the other hand, one says, "Wait a second. We know who has the better possession of its going on." And the Romans' gift for analogy was extremely gracious. Said this is kind of like a bail man situation, in which it turns out I'm holding something for your benefit under a contract for mutual gain. And so the risk is going to remain with me if I'm negligent in the care of it. But if it's an act of God, it goes over to the other side. And again, all of these transactions could be negotiated out. And this then leads to the development of the doctrine of supervening impossibility or frustration, in which it turns out in the famous case, I have a contract to sell you a particular good for a particular purpose. And the purpose is a grand party, but it turns out that the day before the party, the entire facility burns down so there can no party be held. And the question is who can sue whom for what on this collateral contract, when its aim and purpose cannot be discharged? These cases are extremely difficult, and if anybody had an explicit risk allocation, you would respect it. But if you don't, it then becomes very tricky. And the usual answer that one starts to give on these things is if nobody has done nothing and there's no wrong on any side, what happens is there is no particular gain that you have from having an incentive structure which allows one party to sue the other party. So there's a tendency to say, "Well, the whole thing is thrown up from that particular point in time." That's called frustration of promise under both the Roman and the modern world. It becomes even more difficult if certain money has been paid for the service in question, which turns out never to be rendered, and does the money remain where it is or does the money have to be returned in whole or in part? The Romans never get to this particular stuff, but when the English courts get to it in cases around the turn of the century, 19th century, Taylor v. Caldwell and Krell against Henry, they have a devil of a time trying to figure out what's going on. Why is that? Because when these risk are low probability and they are not fully understood, it's very difficult to guess what people will do because there likely to be a very different, wide variety of responses that start to happen. And so that's the basic situation you have. And then there the further rules. Can you assign these obligations to third parties, delegate their duties? Greater freemen with the right to receive stuff, much less freedom with the right to delegate these things out. PUBLIUS: At the beginning you mentioned 3 types of good faith contracts. You’ve now covered sales - what about the other two? RICHARD EPSTEIN: The contract of hire, which is the second of these contracts, is in fact three-part kind of an arrangement. It's a very difficult set of contracts. One of these things in effect that what happens is that you have a contract for hire. And what that means is that I'm going to work for you. And so if you want to talk about hire, you would hire a worker, and the Roman expression for this was locatio conductio, which means nothing and nothing, right? It means ... one person leads something out, and the other person takes the place. But it's an ordinary labor contract, and you then have to decide what the default provisions are going to be. Typically, these are associated with contracts at will, meaning that it can be terminated at will by either side, subject to the understanding that if work has been done, then payment has to be given for it. It's usually the case that an employer pays after the work has been done. But this is, again, one of these things that can be varied by contract. And there's a very large amount of stuff that takes place in connection with these things. Another type of situation that you start to have is that what happens is that you have a good of one kind or another, and what you want to do is to have somebody repair this particular thing. And so what you do is you hand the thing over to somebody else for a repair contract. And at this particular point, it's a contract of hire in some state. And then the issue's going to be, what's the risk of loss on behalf of the jeweler who takes it? And it's quite clear you don't want to treat this like a stranger case. Because if you have a piece of equipment that is a little bit dicey and is at risk, when you say to the seller or to the repairer, "If this thing doesn't come back perfect, you have to pay me for its full value." He's gonna demand a huge premium for this transaction. Generally speaking, you're not gonna be really keen on paying that premium. So what you do is you say, "We are going to hold you responsible to the extent that you do not exercise the ordinary care of somebody in your particular trade or line." Which is kind of a negligence test where the presumption's going to be in favor of the tradesman rather than in the favor of the owner if you're uncertain as to which way these things go. Now, the contract of hire has another feature here, which is somewhat worthy of note, which is that if in fact you are dealing with the government, and they own property, what's the relationship that they're going to create with respect to land that they wish to go to somebody else? There is usually understood to be a rule which says that a sovereign can never sell land, because that is essentially the compromise his own sovereignty. And so what they did is they developed this contract called emphyteusis, not that I can pronounce it correctly, which is a perpetual lease in which the tenant goes into possession of it. Each particular period, pays the rent. He doesn't pay too much in advance and it's always understood that the sovereign can yank it out from this character. So long. This kind of an arrangement existed in the provinces. It could exist anywhere in Rome with property. And it's exactly the same kind of thing that you have with long-term leases in another kind of place like China, where they don't recognize private property. They have total sovereign power, so they end up creating these personal leases in order to deal with this. PUBLIUS: Is there any overlap between contracts of sale and contracts of hire? Does this present any unique difficulties? RICHARD EPSTEIN: This is not all that good. So give you just one simple case, two couple cases, actually. The first one is somebody comes up to you, and they say, "What I'd like to do is I would like you to find a piece of steel or metal and to craft me a fine crown that I could put on my head, studded with jewels." And it turns out that all of the material that are gonna be put into this thing is getted by the creator, who then adds his layer. And one of the things you could say is, "Well, if he doesn't perform, what is it then?" It's A, a failure to deliver a good. And B, it's a failure to perform a service. Could you imagine creating a system in which you have to bring two rites of action, one for the service component and one for the transfer component where there's nonperformance? Everybody understands that that's crazy. And so what they did is they came up with a basic rule, is in the end you were supposed to deliver a thing. So it's a one form of action situation, and that action is going to turn out to be the action of a sale. But suppose it's now a slightly different case, and all the materials are supplied by the owner to the other person, who's then told to fabricate them and to put them into some different form, say a valuable piece of equipment or a crown or something like that. And that contract, since the goods come on the one side rather than the other side, is now called a contract for hire rather than a contract for sale. So what you see is that one of the problems you create when you have sale and hire is it's easy to find the cases that fall clearly on one side of the line and then on the other side of the line. And so then there are the cases in the middle.. And there was the following sort of case in which it turns out that what you do is you have a contract for gladiators and horses, and the particular deal that you have is if the gladiator essentially came back alive, it was a contract for hire. And if he died, it was a contract of sale of this particular person. And so what Gaius said is at the end of the race, you can figure out whether these guys are dead or alive, and you know which cause of action you bring for either of them. but you've got to understand that there's a cheat here. And what's the cheat? Suppose this is now an executory contract. And you have no idea as you're about to get these slaves which of them are gonna die in gladiatorial combat and which of them are not. Which action do you bring and why? And this is no longer clear. And this turns out to be extremely important, because what happens is when you started to talk about these things being different types of contracts, they were also different kinds of actions. They were called forms of action. So if you wanted to sue on a contract of hire, you had to bring the actio locatio or the actio conductio. You wanted to bring an action on sale, you had to bring the actio emptio or the actio venditio. And if you've got a transaction that falls in the middle, you don't know which particular form you're supposed to bring, and if you bring the wrong form, procedurally, you're tossed out of court. And justice kind of formalism also applied in early Anglo American law with respect to the forms of action. So it's a difficulty. And the way in which people essentially decide to respond to this, but it takes a very long time to do this, is you say, "We're not gonna have forms of action anymore. We're gonna have causes of action." So what you do is you write out your complaint. There's one form of action. You say, "This is what we think it is." And nobody cares whether it's sale or whether it's hire. They just care that there's a promise which hasn't been performed, and the characterization issues start to go to one side. Because it is always the case in every area of law that when you start with the extreme opposites, you start changing the terms of the particular deal, and these things slowly start to convert. One closer to the other than it would otherwise be. PUBLIUS: What was the third category of good faith contracts? RICHARD EPSTEIN: So now a third of these relationships that we're talking about is partnership. And this is essentially a very different kind of relationship, because sale and hire start off at least as relationships in which something is transferred to somebody else and then back. A partner doesn't have a buyer and a seller. They just have partners. And they're all roughly equal. So you don't have this asymmetrical labeling that you do under these other contracts. So what happens under these situations is this is the classic bona fide contract, because what you're always worried about is whether or not when a given partner starts to take place, the absence that he will take will be designed to benefit his co-partners equally with himself, or to essentially prejudice them to him. So how do these partnerships begin? And why is it that bona fide relationship turns out to be appropriate? Well, the origin of the contract of partnership, we seem to understand, involved an institution known as “urcto non cito.” And what this meant, in effect, was you used to have two sons who within the power of the paterfamilias, Papa now dies. And now each of them is the head of his own family. They're no longer under supervision, but they would like to continue to work together as they did when Daddy was alive. And so what they do is they now start to create some kind of a partnership with them, because since they're brothers, they have high levels of trust between each other. And they realize that there gains from cooperation which allow them to receive more when they act together than they will receive if it turns out that they acted separately. So it makes perfectly good sense for one to have that. And then the other thing, of course, is that whenever you pick a partner, even if there's no blood relationship between them, you don't pick them at random out of a phone book. You pick somebody for whom there are other kinds of bounds that will keep you there so that the social boundaries, the reputational issues, the family connections in effect, will help keep people in line so you don't have to put the full relationship on the partnership situation. So then what Gaius tries to do, and Justinian follows, is figure out what are the incidents of the partnership? And the first thing they start to talk about is the big question of how is it to divide gains and losses? And here there's kind of a strong moral presumption. The presumption is everybody gives out in proportion to what he receives. And so the general sense would be if it's a 50/50 partnership and you're contributing labor, I get 50% of the benefit, and I put in 50% of the cost. And so this thing is symmetrical. And one of the things that we always like about these symmetrical rules is they generalize easy. If it's gonna be one half, one half, it can be one third, one third, one third. And you could keep on expanding the relationship and use the proration technique to divide both the losses that take place and the ultimate gains that take place. The reason why this turns out to be difficult is not that this is a bad intuition, but there may be stuff that's going on which indicates that proration is not gonna be appropriate. So one person may contribute property to the partnership, and the other person only wants to contribute labor. And there two ways you can look at it. One is you can say, "This property's worth 50. My labor's worth 50. Your labor's worth 50. So it's gonna be two thirds, one third." Another way to look at it is to say, "We'll just divide this 50/50. And then what we'll do is figure out the fair market value of the thing and we'll buy it from the partnership so it's 50/50. The thing's in the partner, and you're gonna be in the odd position of paying yourself for half of it. But essentially what's happening is I'm buying half of the other thing and we do it that way. This choice of method still exists today. And you have to do exactly the same thing that the Romans did. And so what Gaius does is he says, "Originally, we all thought these things were prorated, but later on it turns out that we're now willing to give partnerships in which we not only have funny allocations because of these purchase, but we're willing to say that one guy gets more than the other. And in the extreme, we're willing to allow some people to come into the partnership where they bear only the gains but they don't bear any fraction of the loss, so valuable is the stuff that they are receiving with respect to the overall relationship. And again, this is a case in which the freedom of contract model is fine, because if you prohibit that thing from taking place, it may well be that a perfectly viable deal is not gonna happen because you can't make people happy. And you therefore depend upon them to use their own good judgment to figure out how much they want to fix by way of guarantees to one partner, vis a vis the others. And if one thinks that this is only an ancient problem, many a modern law firm has killed itself. Because what they do is they have a pro rata share of response ... of benefits to all the partners, old and new. But then they give a guarantee to some particularly strong hotshot, and they can't make the guarantee, so everybody else goes under. So these allocation issues existed in Roman law. And Gaius got the right answer on freedom of contract, and then went into the ways in which these things operate. Now, the second thing that you have to do is to figure out how it is that you're supposed to work when you're dealing with one of these partnerships. And this is where the rule of bona fides really starts to matter. Because essentially what happens is whenever there's a partnership, there's what we call an agency course problem. I am doing something for the benefit of both of us. I expend X units of labor, from which I only get one-half the benefit. Now, if we just put a little bit of numbers to this, and we say, "I now expend 10 units of labor," and it turns out that the total partnership gets 15, if I'm an egotist, I say, "Oh, 15 divided by 2 is 7 1/2. I'm spending more than I'm taking in. To hell with this. I'm just not gonna do it." But if you're talking about a system of good faith, you now quite precisely have to weigh the benefits of your partner equally with your own. So if the venture is positive sum, meaning in effect that you get 20 between the two of you, for an expenditure of 15, what you have to do is to take it, even if you get the short-term loss. Well, why would anybody want to do this? Because of the reciprocity of the arrangement. If you've got two partners, both of them are going to be doing stuff in this particular fashion. And if that turns out to be the particular case, then you take it on the chin in the first situation, and he will take it on the chin in the second situation, but what happens, instead of having no transaction when there's a potential of 10 dollars in gain, you get two transactions. So you manage to keep them both up. So these things have very high levels of fiduciary duties amongst them, where the standard is perfectly clear as to what you're doing, which is essentially take those particular actions, which from the point of view, mean that when you look at total cost over total benefits, and total benefits, the total cost exceed maximally the total cost ... total benefits exceed the total cost of the arrangement. Or let me say it correctly: If you're talking about one of these arrangements, what you're trying to do is to make sure that total benefits exceed total cost. And then the divisions will take place in accordance with the general formula. But you do this only with respect to the overarching situation. You don't do it with each particular transaction. PUBLIUS: Are there different basic types of partnership in Roman law? RICHARD EPSTEIN: Now, the other question that we have to do is to figure out: Is there an opportunity for strategic behavior that take place under these circumstances? And the Romans understood and developed what later became the principle of corporate or partnership opportunity. And this is the situation. First of all, when you're dealing with a partnership, there are two types: there ones of those where there was a particular venture, and you only resources that were committed to the partnership, were those which were essentially especially endued with it, but there was another kind of partnership called omnium bonorum, which meant all of your goods went in. This may sound strange to you until you realize that if these two partners were brothers, everything that they had in their father was owned by him, omnium bonorum, and they're just keeping the thing going. And so what happens is: What about the division at the end of a partnership? In the ordinary case, when you divide the partners, you look at the kind of rules and whatever the division is, you make it in accordance with that particular plan so that liquidation exists. The Romans were very clear that you could always liquidate a promise voluntarily. And they also knew that if one side sued the other, that was treated as a sign that trust was gone. And so it was treated as a de facto separation of the partnership. We then have to allocate the asset. So the famous case that Gaius talks about is it turns out that there is a partner in one of these omnium bonorum relationship who understands that he is about to receive some large benefit from a third party, which means that he would have to divide the thing 50/50 with the other fella in accordance with this basic rule. So what he does is he calls unilaterally for a division of the partnership arrangement. Now that it's separate, he says, "This large sum is all mine. It's not yours." And the answer is we see the opportunity for strategic behavior. And so what the Romans did was to develop rules that are still used today, which I loosely call "heads I win, tails you lose" kinds of rule. And so what this means is that if in fact you see somebody engaging in that sort of specific behavior, strategic behavior, what you do is you say, "Sorry. This withdrawal doesn't work. And you have to give 50 dollars from the outside or 50% of the outside to me." So there's now no incentive to try to cheat to get this separate benefit, because you're gonna have to do it anyhow. On the other hand, if it turns out that you break the arrangement and now I get some unanticipated goody from a third party, I don't have to share that with you because you're the one who's wrong. And the whole point of this rule with the "heads I win, tails you lose" situation is you want to make it very, very clear that this form of strategic behavior is utterly unacceptable. And variations of this rule are still in effect today. Everywhere you look in the corporate opportunity situation, if it turns out that somebody promises a very nice deal to a corporation, one of its principal agents cannot say, "Hey, forget about this corporation. I got this separate business over here. Let's do this deal separately." You gotta turn the thing back to the corporation. So these rules essentially have tremendous durability. PUBLIUS: Can you give us any other examples of Roman law contract rules? RICHARD EPSTEIN: Now, the last set of rules that one deals with are the rules having to do with a kind of an agency relationship called "mandate". We've already encountered mandate in connection with the situation where somebody collects a debt or releases a debt, which is owed to somebody else. And he has to act in good faith. And those kinds of arrangements absolutely take place all the time. Agency ... a mandate is slightly different from a modern agency arrangement, because what happens is when the person who receives the commission to discharge enters into a deal with the third party, what he does is he's the only party to that contract with the outside. And therefore whatever he has, afterwards he has to give over to the other party in accordance with the principles of good faith. And so there is no doubt whatsoever that in dealing with these types of situation that you have this kind of two-party relationship. And so the question then is how does this work? And well here, the first question you always have to ask is: Did the agent exceed the authority that was given to him by the principal? And if so, then he's on it for his own hook. If he didn't exceed it, then in effect, he discharges the contract. Then if it turns out to be a losing contract, the risk of this loss is going to fall upon the principal authorized the deal rather than the agent who sort of faithfully carried this sorts of things out. But what happens is you have this second awkward step in which it turns out that the principal authorizer is not the fellow who can bring this suit until he takes an assignment of rights, whereas in the modern situations, if I'm your agent, and I make a deal with a third party X, I drop out of the situation and the contract is between you the principal and X the third party. And you don't have to worry about these subsequent assignments. Which is a much more efficient type situation. We've already indicated that when you're dealing with settlement of these obligations, the good faith notion is whether or not you've composed these things in ways that were designed to benefit your principal or whether you to do with others. Now, agencies like this were in general gratuitous. And so you have the stack problem in Roman law, which is as follows ... which is what you do is you authorize somebody to undertake an action on your behalf. And the person who essentially is authorized decides in a certain period of time that he'd rather not do it. Can he back out of the situation, given the fact that his promise was gratuitous and that the most that he could recover would be the expenditures that he makes out of pocket, but he could recover nothing for his own labor? And the Romans came up with essentially the right distinction. If it turns out that you want to withdraw in ton, so that the principal could get another agent to discharge the task, then you're entitled to do so. Because we don't have executory enforcement. But if in fact when you essentially want to withdraw and it's impossible to get in a substitute, at that particular point you can't do it, because you're leaving somebody high and dry. And so in many cases you then have to ask, "What happens if an agent forgets to do his job by the principal?" And this could happen in a famous case, where what the agent is supposed to do for the partnership of which he's one member is to take out insurance on a ship. And he forgets to do it, and the ship fails. And the question is whether or not when he simply forgets to do this he could be held liable for what the insurance would have covered. Under the Anglo American law, unless there was consideration, generally speaking it would be very difficult to enforce it. The Romans are much more comfortable with these gratuitous relationships. So, so long as it was something that was in the course of the agency and has no excuse for nonperformance like he was blocked from getting to the pier because he had been robbed on the way there ... he is gonna start to be held. So you've got these four kinds of relationships. They work well. The last topic I will talk only for about a minute or two is we've already mentioned modification. But it's important to note that these modifications take place via contract known as novation. And the way in which novation tends to work, particularly for strict financial obligations, is you first have a deal between A and B. And then they want to modify it in some way. The first way in which the novation starts to take place is it's the same two parties that we had originally, but we alter the terms: increase the debt, change the interest, postpone the payment, change the installments and so forth. And these arrangements are fine. The more difficult kind of novation involves a third party, where you substitute in a new debtor for an old debtor. And what you have to do is to go through a series of ceremonies in which it turns out that you have simultaneously a release of the original debtor from his obligation. And then the substitution of somebody else in his place with the consent of the other party. And Roman law has a very long kind of discussion of what happens when there are various mistakes that take place in this case, and the answer is it's really hard to discover those things. But there's no time to talk about them in a general discussion. And the final topic is formal release. It's called “acceptilatio.” And many times what happened is when you made a payment. What happened is there was a formal ceremony analogous to the modern receipt which indicated that all had been done. And with time, you could have the formal ceremony even if you didn't have the payment. And so acceptilatio became a systematically fake form of release. It's easy to see how you release a financial obligation for a fixed sum. And what typically happened is if they were diffuse obligations, you would re-characterize them by novation of one form or another into a fixed obligation, and then would release them. And so the Romans' laws had a very powerful system of contract, good classification, good rules on formation, good rules with respect to mistake, good rules with respect to frustration, good rules with respect to modification, pretty good rules with respect to third party beneficiary, good rules essentially with respect to release. And so compared to anything that went before, this was light years ahead. And it's a system which in the areas in which it applies, essentially is regarded today as a great intellectual achievement that shapes modern law, especially in civil law systems, but also in common law systems. NARRATOR: Thank you for listening to this episode in the Roman Law unit of the No. 86 lecture series. The spirit of debate of our Founding Fathers animates all of the No. 86 content, encouraging discussion and critical reflection relative to how each subject is widely understood and taught in law schools and among law students. 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