What the Law Supposes

by Barry Goldman

“You were present on the occasion of the destruction of these trinkets, and, indeed, are the more guilty of the two, in the eye of the law; for the law supposes that your wife acts under your direction.”

“If the law supposes that,” said Mr. Bumble, squeezing his hat emphatically in both hands, “the law is a ass — an idiot.”

Charles Dickens, Oliver Twist

I am an arbitrator. I serve mostly in cases between labor unions and employers, but I also serve for the Financial Industry Regulatory Authority (FINRA) in cases between customers and brokerage firms. I am not a judge, but the principles that apply to judicial and arbitral decision making are essentially the same.

Unions and employers come to arbitrators with disputes about the meaning of terms in their collective bargaining agreements. The agreement might say, for example, “Employees assigned to this work shall receive premium pay until the task is complete.” Everyone agrees on what the contract says. But what does it mean? What is “the task?” And when is it “complete?”

The union says the task is the whole project. The employer says the task is the particular assignment within the project. How is the arbitrator to decide?

There are rules for this sort of thing. Some of them are very old and have Latin names. One of the rules says a term in a contract has the same meaning whenever it appears. So, if we don’t know the meaning of the term “task” in Article 7, we can look at the rest of the contract and see if the word appears somewhere that we do know the meaning. Then we just apply the rule. It means in Article 7 what it means in Article 12.

There is a corollary to this rule. Arbitrators assume if the same term is used the same meaning is intended, and we assume if a different term is used, a different meaning is intended.

There are many other rules like this. We suppose, for example, that everything in a contract is there for a reason. Collective bargaining agreements contain “no mere surplusage.” We also assume the contract, read as a whole, makes sense. If there are two possible readings of a provision, one of which conflicts with another provision elsewhere in the contract and one which does not, we construe the contract according to the internally consistent meaning.

There is a fiction at work here. The law supposes the drafters of the contract combed through it painstakingly, searched out all the inconsistent usages, ambiguities, vaguenesses and infelicities, and rooted them out. The drafters, we assume, knew precisely what they were doing, and went about it with scrupulous care. Anything that remains is intentional.

No one who has ever been in the room where a labor negotiation was taking place believes a word of this.

But you can see how such rules might have come about. People want to be able to make agreements, and they want to be able to hold one another to their commitments. Oral contracts, as the saying goes, aren’t worth the paper they’re not printed on. So written contracts developed, and where there are written contracts, there are disputes about the meaning of terms. Given a choice of rules about how such contracts are to be construed, a set of rules that supposes written contract language is consistent, coherent, intentional, and meaningful is the logical option.

Signing a contract is a significant act. It binds the signer to a commitment and to the consequences of failing to follow through on that commitment. The law supposes, as it must, that if you signed a contract a) you read it, b) you understood it, and c) you voluntarily agreed to be bound by its terms. Otherwise, what’s the point?

However, unless you are reading this first thing in the morning having just opened your eyes, it is likely you clicked on a box and legally signed a contract today that you didn’t read and don’t understand.

This creates a certain tension. On one hand, we want people to take their commitments seriously. On the other hand, we know no one actually reads the stuff they sign, and it wouldn’t do them much good if they did. Next time you check into a hotel or rent a car or visit a doctor’s office, stop and read the forms they ask you to sign. Ask questions about anything you don’t understand. Raise objections to any terms that seem unfavorable or unclear. Offer to negotiate alternative terms. Let me know how it works out.

A story comes to mind. When I was a baby lawyer buying my first house I gathered all the documents together before the closing and spent a day and a night reading them closely. There was one document I just didn’t understand. When I got to the closing I asked about it. “What is this?” I asked. “I don’t understand what this is.” “That” the mortgage lady said calmly, “is something you have to sign if you want our money.”

A similar tension exists in the financial arena. Everybody knows you are supposed to invest for the long term in a broadly diversified portfolio of stocks and bonds, blah blah, index funds, blah blah blah. But suppose we have an investor who doesn’t want to do that. Let’s call him Jones. Jones wants to speculate. He’s willing to take greater risk in exchange for the potential of greater rewards. He can do that. He can trade options. He can trade naked options. He can trade on margin. He can buy 3X inverse ETFs. And he can ignore all the advice in the financial world, ignore diversification entirely, and put all his money in one concentrated position. But first the investment firm is going to make him sign a pile of documents. He’s going to have to sign that he read the options agreement and the margin agreement, and that all the risks were disclosed, and he understood everything, and he knows what he’s doing, and he wants to do it anyway. He will have to initial every paragraph.

Now, instead of Jones, (the knowledgeable, experienced, and sophisticated investor) let’s substitute Smith, the proverbial little old lady in tennis shoes. A nice young man called Smith on the phone one day and, out of the goodness of his heart, offered to help her secure her financial future. He took her through all the same documents and got her to sign every page. She understood exactly nothing. She just thinks it’s lucky that the nice young man happened to call her up.

When Smith and Jones both lose all their money and file arbitration cases against their investment firms, an arbitrator is going to have to determine whether they should recover and, if so, how much. The documentary evidence – the signed agreements – will be identical in both cases. The law says if you sign a document you are deemed to have read it and understood it, and you agreed to be bound by its terms. At the same time, we realize “if the law supposes that, the law is an ass.”

These decisions are difficult. Even if we operate with perfectly sound rules, reasonable people can disagree. There is no mechanism that will automatically generate sound decisions. The best we can do is try to build fair processes and employ qualified decision makers.

We’d like our decision makers to be smart and thoughtful, sober and wise. But the system can survive even if they are not. Ordinary people will do. What the system cannot survive is corruption. If our decision makers are corrupt, all the rules in the world will not save us. We will squander the public trust, and the system will go to hell.

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