Economic Analysis Of Contract Law Research Articles

A Feminist Economic Perspective on Contract Law: Promissory Estoppel as an Example

Economic analysis is a highly influential theoretical approach to contract law. At the same time, feminist analysis of contract law offers an important critical approach to the field. However, feminist economics, a prominent alternative approach to mainstream neo-classical economics drawing from both economic theory and feminist theory, has only been applied scarcely and sporadically to contract law. This Article seeks to bridge this gap and to apply the key features of feminist economics to an analysis of the doctrine of promissory estoppel. This Article uses promissory estoppel as an example to demonstrate a feminist economic analysis of contract law.

A Feminist Economic Perspective on Contract Law: Promissory Estoppel as an Example

Economic analysis of contract law is a highly influential theoretical approach to contract law. At the same time, feminist analysis of contract law offers an important critical approach to the field. However, feminist economics, a prominent alternative approach to mainstream neo-classical economics drawing from both economic theory and feminist theory, has only been applied scarcely and sporadically to contract law. This Article seeks to bridge this gap, and to apply the key features of feminist economics to an analysis of the doctrine of promissory estoppel. This Article uses promissory estoppel as an example with which to demonstrate a feminist economic analysis of contract law.

From Langdell to Law and Economics: Two Conceptions of Stare Decisis in Contract Law and Theory

In his classic monograph, The Death of Contract, Grant Gilmore argued that Christopher Columbus Langdell, Oliver Wendell Holmes, and Samuel Williston trumped up the legal credentials for their classical bargain theory of contract law. Gilmore's analysis has been subjected to extensive criticism, but its specific, sustained, and fundamental charge that the bargain theory was based on a fraudulent misrepresentation of precedential authority has never been questioned. In this Essay, I argue that Gilmore's case against the classical theorists rests on the suppressed premise that the precedential authority of cases resides in the express judicial reasoning used to decide them. In contrast, I argue that the classical theorists implicitly presuppose that the precedential authority of cases consists in the best theory that explains their outcomes, even if that theory is inconsistent with the case's express judicial reasoning. The classical view of precedential authority completely defuses Gilmore's charge of fraud. In Gilmore's view, merely demonstrating the inconsistency between the proposition for which the classical theorists cited a case and the express reasoning in that case suffices as proof of misrepresentation. But in the classical theorists' view, the express reasoning in a case is simply a theory of its precedential authority, which, like any theory, can be wrong. Thus, the classical theorists simply reject Gilmore's claim that a case cannot properly be cited for a proposition inconsistent with its express reasoning. The real dispute, then, between Gilmore and the classical theorists is over the nature of precedential authority and not the content of contract law. Having reframed the classic death-of-contract debate, I then trace these competing conceptions of precedential authority through the major schools of contemporary contract theory. I argue that a contract theory's embrace of one view instead of the other can be explained by the relative priority it accords to each of the two components in a conception of adjudicative legitimacy. A conception of adjudicative legitimacy consists in a theory of what it means for a decision to be based on law and a theory of what is required for law to be justified. I explain why theories according priority to the former tend to subscribe to the precedents-as-outcomes view, while theories according priority to the latter tend to favor the express reasoning view. The Essay concludes by arguing that the economic analysis of contract law subscribes to the precedents-as-outcomes view and therefore is the contemporary jurisprudential successor to the late nineteenth-century classical theorists.

UNA CRÍTICA A LA IDEA DE INCUMPLIMIENTO EFICIENTE DESDE EL DERECHO DE CONTRATOS

The theory of efficient breach of contract is one of the core components of the economic analysis of contract law. This paper makes a review of this theory. On this respect, and starting from an instrumentalist perspective, consistent with law and economics, the paper claims that efficient breach is an inadequate approach towards the analysis of remedies for breach of contract.

Over-Reliance under Contractual Disgorgement

A well-known result in economic analysis of contract law is that expectation damages lead to over-reliance by the non-breaching party. Recently, the contractual disgorgement remedy has attracted much attention from scholars, yet no attempt has been made to analyze reliance investment under this remedy. In this article, we develop a model showing that under disgorgement a problem arises that is the mirror image of the problem that arises under expectation damages. While expectation damages lead to over-reliance by the non-breaching party, the disgorgement remedy leadsto over-reliance by the breaching party. Therefore, the choice between these two contractual remedies shoulddepend on which over-reliance problem is more costly. We also highlight other factors that can guide the choice between these two remedies.

Justice, Fault, and Efficiency in Contract Law

This article explores some of the core concepts that underlie contract law. It rejects the feasibility of a uniform theory of contract law including a critique of the economic analysis of contract law. The importance of efficient contract rules and efficient contracts is not disputed, but efficiency’s explanatory power is limited due to the breadth of contract law, as well as the complexity and dynamism of modern contracting. Behavioral law and economics is introduced as a method for making law and economics more predictive of real world contracting. The article selects three core principles for analysis—justice, fault, and efficiency that help explain the essence of contract law. It also reflects on the tension between freedom of contract and paternalism.

Against the Reductionism of an Economic Analysis of Contract Law

Contemporary economic analysts of the law argue that certain legal institutions, such as contract law, ought to be designed to promote wealth maximization, while different legal institutions ought to seek to achieve non-wealth maximizing aims, such as distributive justice. In order to preserve the normative claim that the sole aim of any single legal institution should be the promotion of wealth maximization, economists rely on the “specialization principle”: each legal institution must be organized around a single normative criterion, partitioned from and without regard to the normative aims of other legal institutions. I argue that this idea of a strict normative division of labour between institutions is problematic. On any instrumentalist view, the normative justification of the ends of a particular legal institution cannot ignore the normative aims of the legal system of which it is a part. I develop this argument by critically examining the economic analyst’s claim that commercial contract law should be limited to helping firms maximize profit.

Economic Analysis of Contract Law from the Internal Point of View

Economic analysis of law has traditionally assumed that legal rules are or ought to be designed to maximize social welfare taking as given that legal subjects are like Holmes’ “bad man” — rational, self-interested agents who care about complying with the law only insofar as non-compliance exposes them to the risk of sanctions. This Article challenges this motivational assumption while keeping the standard economic framework otherwise intact on the grounds that while some legal subjects are, like Holmes’ bad man, “externalizers” of legal rules, others regard the law from the “internal point of view,” that is, they are “internalizers” of legal rules who are motivated to conform to legal rules apart from the consequences of defiance on a particular occasion. The Article derives specific doctrinal implications for contract law assuming that there are internalizers as well as externalizers in the subject population. It analyzes several contract law phenomena: the expectation principle, according to which a victim of a breach of contract is entitled to his expectation, and no more than his expectation; the penalty doctrine and stipulated damages clauses; the doctrine of willful breach; and the doctrine of contract modification. The resulting analysis shows that internalizers respond to these doctrines differently from externalizers and evaluates how the prescriptive implications of economic analysis for the design of contract law doctrines changes once we recognize that there are both internalizers and externalizers in the population. For example, the presence of internalizers in the subject population provides a justification for punishing some “willful breaches” more harshly than ordinary breaches. It also helps to justify the modern doctrine of contract modification.

Overcoming Theoretical Indeterminacy

Law and economics has become one of the leading research programs in law. Yet, after four decades it still cannot answer simple questions such as what is the optimal remedy for contract breach. The problem is not limited to contract law. There is also no consensus on other simple questions, such as whether losers should pay winners’ legal fees or whether tort law needs to be reformed. In a widely cited 2003 Yale Law Journal article, Professor Eric Posner argued that economic analysis of contract law has been a failure when it comes to generating clear-cut explanations or policy recommendations. The reason, he argued, is that the theoretical results depend on the values of the parameters. But empirical data are usually not available. The resulting lack of consensus is the main reason why law and economics has had such a small impact on treatises, textbooks, and court decisions. This essay offers a breakthrough to this major problem. I show that most of the indeterminacy in contract scholarship is due to the ‘bad habit’ of trying to solve many problems with a single legal rule. Doing so is problematic for two reasons. First, such a single rule will be a compromise rule, which is not very effective at solving all the problems. Second, choosing the right compromise requires information on the relative social importance of all the problems; such information is nearly impossible to get, and therefore makes the discussion indeterminate. The solution I propose is simple: use a separate rule or doctrine per problem. In practice, this involves using more fault rules and avoiding strict liability or pricing rules. But theoretical scholars should also do what empirical scholars have done for so long—formulate rules of thumb and evidence burdens to get out of indeterminacy. This essay is the first to propose such a rule of thumb for theoretical research: when considering strict liability or pricing rules to solve more than one problem at the same time, discard problems with a social importance of less than 10% of the total. The reason is that loss-sharing strict liability rules can in such cases solve no more than 1% of the total problem. Applying these proposals to contract remedies, I show that determining optimal rules becomes remarkably simple, and that most of the indeterminacy disappears.

The Expressive Cost of Specific Performance

A long-standing controversy exists in contract law scholarship whether courts should grant relief for breach of contract in the form of expectation damages or specific performance. Although damage relief is the default remedy in this country, many modern contract theorists favor specific performance as a more appropriate default remedy for breach. Interestingly, two very different strands of scholarship advocate specific performance as a default remedy. Ethical theorists favor a specific performance default because it aligns with the moral obligation that promises must be kept. Scholars in the economic analysis of contract law promote specific performance because it enables efficient breaches on the basis of private bargaining. In this Article we show that both diverse fields of scholarship have overlooked a crucial interdependence between the right of specific performance and the perceived immorality of efficient breaches of contract. While the current literature recommends specific performance as an appropriate remedy if contract breaches are immoral or when impediments to bargaining are minimal, we posit that the moral acceptability and bargaining themselves are affected by whether specific performance is available as a default remedy or not. We argue that, when expressed as a legal default, the legal right to demand performance creates a sense of entitlement and resentment against breach. This legal entitlement effect induces aversion against breach even when performance would be inefficient. Conducting a series of experiments implementing real contracts, we examined the enforcement decisions of promisees confronted with an efficient breach. We provided some participants with a default remedy of specific performance while others could prevent the breach without relying on a specific performance default. Participants preferred to forsake their immediate materials interests in order to obstruct efficient breaches when a specific performance default was available. The availability of a specific performance default increased resentment and moral opposition to efficient breach among promisees even when their material interests in the contract were fully protected by expectation damages. We provide several contributions to the literature. First, since the case for specific performance largely rests on the ability of parties to renegotiate a mutually beneficial outcome, the observed conflict complicates bargaining and thus weakens the efficiency argument in favor of specific performance. Second, our findings add insight into an emerging literature that highlights the impact of defaults in contract law. Third, we challenge deontological conceptions of the immorality of contract breach by suggesting that the acceptability of the efficient breach is not a given, but strongly depends on the institutional context.

Virtue Ethics and Efficient Breach

The concept of “efficient breach” - the idea that a contracting party should be encouraged to breach a contract and pay damages if doing so would be more efficient than performance – is probably the most influential concept in the economic analysis of contract law. It is certainly the most controversial. Efficient breach theory has been criticized from both within and without the economic approach, but the most prominent criticism is that it violates deontological ethics - that the beneficiary of a promise has a right that it be performed, so that breaching the promise wrongs the promisee. This essay argues that this criticism is misplaced, and that efficient breach theory, properly understood, is entirely consistent with parties’ complying with their deontological obligations. Instead, the intuitive resistance that most people experience to the concept may be better explained by aretaic concerns - specifically, that failing to complete a contractual relationship is not conducive to virtuous character or to the maintenance of a flourishing community. While efficient breach can be squared with deontological ethics, it cannot be squared with virtue ethics unless one is prepared to argue that seeking efficiency is a virtue, or at least that it is not a vice.

What Can Contract Lawyers Learn from Law and Economics?

This is the lecture text which I was invited to given at the University of Tasmania. My aim in this lecture is to offer some general observations on what insights law and economics, which is also known as the economic analysis of law, can offer us into contract law. I argue that despite some serious limitations of this approach, contract lawyers can benefit from the economic analysis of contract law. At least, we can benefit in three ways. Firstly, economic analysis can be a method to evaluate the effectiveness of law. Secondly, it can help us in identifying the winners and losers created by the law. Thirdly, it can broaden our understanding of business behaviour so that we can make contract law meet legitimate commercial expectations. The lecture will proceed as follows. After a brief review of the history of the law and economics movement, I will use three examples in English contract law, namely misrepresentation, the exclusion clause in consumer contracts, and the unfair contract term to illustrate the three merits of law and economics noted above.

Bargaining Within the Shadow of Fairness: Economic Analysis of Article 4.109 of the Principles of European Contract Law

The problem of unequal bargaining power has been widely analyzed within the philosophical and economic literature. In this article I would like to concentrate on the issue of “excessive benefit or grossly unfair advantage” as envisaged in Article 4.109 (ex art. 6.109) of The Principles of European Contract Law (PECL). The normative significance of PECL indicates that the codification may be applied by parties as a supranational system of general principles of law or international commercial law (lex mercatoria). The economic analysis of European contract law will be divided in two parts. The first part will include the traditional economic analysis of contract law under an unrealistic assumption of zero transaction costs. It could be argued that even then contract failure may occur. This part concerns the so-called “contract failure”. The second will be focused primarily on contracts made in a positive transaction cost world, where the presence of transaction costs leads to a “market failure”. Both parts pertain to the regulation of contracts by courts within a framework of judicial governance. The main instrument of such judicial governance seems to be the concept of a hypothetical bargain or hypothetical contract. The most appropriate tool to be implemented in these cases seems to be game theory. Whether the benefit is excessive or not, it should be compared with the hypothetical division of surplus from the exchange stemming from the face-to-face ideal bargaining process. Thus the problem of a “market failure” may be analyzed from the perspective of a potential solution to the bargaining problem. In conclusion I would like to address the question of whether and under what conditions it is possible to construct any plausible and generally accepted criteria of fairness in order to restore contractual equivalence in case of gross inadequacy in bargaining power.

Law and Economics: Origins and Development

The article analyzes the main stages of establishment and development of Law and Economics. The history of the discipline has had a considerable impact on its current state: today Law and Economics comprises different schools and approaches. On the one hand, the competition of approaches within the single discipline has broadened its scope, but on the other hand, it has intensified contradictions between the approaches and complicated the choice of methodological framework for the analysis. The differences between various approaches are explained basing on the example of the economic analysis of contract law.

A Revised Economic Theory of Disclosure Duties and Break-Up Fees in Contract Law

Economic analysis of contract law offers an influential argument against imposing a duty to disclose information and in support of guaranteeing reimbursement (break-up fees) for pre-contractual investments in acquiring information. According to the conventional wisdom, a negotiating party invests resources in information gathering on the basis of its expectation to extract the contractual surplus that the investment may generate. As a result, it is arguably essential to protect the investing party's ability to benefit from its investment in gathering information. Such protection can be provided either by allowing non-disclosure of relevant information that was discovered through a deliberate effort, or by strengthening its bargaining position through break-up fees. This article presents a revised theory, which substantially narrows the economic case against disclosure duties and in support of break-up fees. This paper's basic insight is that a negotiating party invests resources in acquiring information not only — and often not even primarily — to strengthen her bargaining position vis-a-vis her counterpart, but rather to achieve an advantage vis-a-vis her competitors (e.g., other traders who are interested in the same contract). A trader that acquires private information about the transaction's actual value can adjust her offer to reflect this information, and will thus have a greater likelihood of winning valuable contracts. Assuming that parties receive some benefit from contracting according to the price that reflects the transaction's actual value, a negotiating party has a competitive incentive to acquire information even if she knows ex-ante that her price offer will fully reflect her ex-post private information. Accordingly, forcing a negotiating party to disclose private information to her counterpart would not necessarily impede the ex-ante incentive to invest in acquiring such information. The upshot of this argument is that the mind-set of the existing literature, which argues against imposing a duty to disclose deliberately acquired private information and in favor of reimbursement provisions, cannot be substantiated without a careful inquiry into competition-based motivations to gather information.

Cooperative investments induced by contract law

I revisit the economic analysis of contract law for a setting of cooperative investments. While Che and Chung (1999) have shown that expectation damages perform rather poorly, I argue that this negative result follows from their implicit assumption of unilateral expectation damages. Yet the very nature of cooperative investments gives rise to the possibility that both parties may claim expectation damages. I show that such a regime of bilateral expectation damages provides the incentives for the first‐best solution even in a framework of binary choice where, for selfish investments, the traditional overreliance result would hold.

The Law and Economics of Contract Interpretation

Contract interpretation is an understudied topic in the economic analysis of contract law. This paper combines simple formal analysis of the tradeoffs involved in interpretation with applications to the principal doctrines of contract interpretation, including the four corners rule, mutual mistake, contra proferentum, and what I call the (informal but very important) rule of extrinsic nonevidence. Gap filling is distinguished, and the relativity of interpretive doctrine to the interpretive medium - jurors, arbitrators, and judges in different kinds of judicial system - is emphasized.

'Just the Oven': A Law & Economics Approach to Gestational Surrogacy Contracts

Gestational surrogacy is a form of artificial insemination whereby a doctor implants the fertilized eggs of a woman into the surrogate's uterus. Gestational surrogacy contracts are unenforceable almost everywhere in the world. In this paper, we support the thesis that these contracts should be enforceable. Our approach is informed by the economic analysis of contract law and is predicated on the assumption that law should serve social welfare (as a function of individuals' well being). We discuss and rebut the arguments most often invoked against surrogacy: immorality, commodification and exploitation. Finally, we present some legal policy proposals for the regulation of gestational contracts in order to safeguard the best interests of the child, to ensure the informed consent of surrogate mothers and to protect intentional parents from the surrogate's opportunistic or reckless behavior.

Economic Analysis of Contract Law

Contract law governs agreements between parties. This paper contains the chapters on contract law from a general, forthcoming book, Foundations of Economic Analysis of Law (Harvard University Press, 2003). Chapter 13 presents an overview of the subject. Chapter 14 is concerned with contract formation, that is, with the process through which parties find contracting partners, with aspects of contract negotiation, and with the rules governing when an arrangement between parties becomes legally recognized as a contract. Chapter 15 considers at length an important type of contract: the contract to produce something. Chapter 16 is concerned with two other types of contract: the contract for transfer of possession of something that already exists (such as land or a painting), and donative contracts.

Economic Analysis of Contract Law after Three Decades: Success or Failure?

С точки зрения Познера, направление право и экономика не смогло выдвинуть релевантную теорию, описывающую контрактные доктрины. В статье зафиксированы эти провалы и обсуждается предположение о том, что их причиной послужили методологические проблемы в определении трансакционных издержек.