Contracts
Privatizing Democracy: Promoting Election Integrity Through Procurement Contracts
118 Yale L.J. 744 (2009). Voting machine failures continue to plague American elections. These failures have fueled the growing sense that private machine manufacturers must be held accountable. This Note argues that, because legitimacy externalities and resource disparities across election jurisdictions pose persistent threats to electoral integrity, meaningful accountability will require greater federal oversight. This oversight must take into account the unique nature of the public-private partnership that defines this nation’s system of election administration. This Note thus proposes an amendment to the Help America Vote Act of 2002, which would condition federal funds on state procurement contracts. These procurement contracts would mandate performance-based requirements for vendors to supply the means with which to verify votes cast. Such contracts should not only have third-party beneficiary enforcement mechanisms, but also override the doctrine of trade secrecy invoked by manufacturers to prevent software disclosure.
Contracting for Cooperation in Recovery
117 Yale L.J. 2 (2007). There is a longstanding debate about whether courts should enforce contract terms purporting to limit the parties’ liability for fraud. It is less-often noticed that many contracts are designed to incorporate fraud liability by requiring one party to make representations about her performance that, if false, can satisfy the elements of deceit. Such contractual representations are best understood as members of a broader, hitherto underappreciated category of contract terms: duties designed to increase the other party’s chances of recovering for breach. Examples include the duty to keep records, to share information about performance, to permit audits, and not to hide breach. This Article shows that the logic of proving proximate harm from the breach of such terms entails that legal liability for such breach often makes a practical difference only when it includes penalties, punitive damages, or other extracompensatory measures. The Article also demonstrates that most of the costs of extracompensatory remedies (such as deterring efficient breach) do not apply when those remedies are attached to duties to cooperate in recovery, and that, in many cases, adopting such duties is a better solution to underenforcement than damages multipliers. Parties now contract for liability in fraud, where punitive damages are available, because they cannot get these remedies in contract. The practical upshot is a new argument against rulings, most recently via a broad reading of the economic loss doctrine, that there can be no liability in fraud for lies that are also breaches. Rather than serving the oft-stated goal of protecting the parties’ contractually chosen allocation of risk, these rules defeat party choice. Even better, however, would be exceptions to the rules against penalties and punitive damages when those remedies are attached to the breach of a duty to cooperate in recovery.
Who Chooses and Who Gets What: Efficient Breach and Efficient Performance Hypotheses
Executives Do Not Need Waivers and Companies Should Not Offer Them: A Response to Mark Kressel
Treaties as Contracts: Textualism, Contract Theory, and the Interpretation of Treaties
116 Yale L.J. 824 (2007) With the nation's treaty obligations proliferating and foreign affairs cases taking up a growing share of the Supreme Court's docket, it is surprising how undertheorized the field of treaty interpretation remains. To fill this void, some have suggested that textualism, which has had a major impact on statutory interpretation over the past two decades, should be applied to treaty interpretation. This Note rebuts that notion and suggests instead that courts draw from modern contract theory in developing canons of treaty interpretation.
The Efficient Performance Hypothesis
116 Yale L.J. 568 (2006) Notable American jurists and scholars have advanced an approach to contract enforcement that would render breach legally and morally uncontestable, assuming compensation follows. Much of the justification for this endeavor has rested upon claims of judicial and economic efficiency. But efficiency neither favors nor disfavors this conception of contract, formalized by the efficient breach hypothesis. This Essay develops an alternative approach to contract enforcement, expressed as the efficient performance hypothesis. The alternative approach predicts the same efficiency as the traditional one, but differs starkly in terms of its ethical understanding of contractual obligation. The efficient breach hypothesis supposes that the promisor has the legal right--not merely the power--to choose to perform or pay damages. That right belongs to the promisee under the efficient performance hypothesis. These discrete conceptions of promissory obligation do not exhaust the possibilities of course, but taken together the hypotheses suggest that other conceptions of legal and moral obligation may be employed within an efficient enforcement framework.
Contractual Waiver of Corporate Attorney-Client Privilege
116 Yale L.J. 412 (2006) A corporate director, sued in her individual capacity in connection with corporate malfeasance, often seeks to raise the defense that she relied on the advice of the corporation's counsel that the proposed course of conduct was legal. A litigation impasse may arise, however, if the corporation, as sole holder of the attorney-client privilege, refuses to waive its privilege. The impasse leaves the plaintiff unable to evaluate the director's claims and leaves the defendant unable to mount her defense. As a solution to this impasse, this Note proposes that directors and their corporations should contract ex ante that the corporation will waive its privilege under these limited circumstances.
Anticipating Litigation in Contract Design
115 Yale L.J. 814 (2006) Contract theory does not address the question of how parties design contracts under the existing adversarial system, which relies on the parties to establish relevant facts indirectly by the use of evidentiary proxies. In this Article, we advance a theory of contract design in a world of costly litigation. We examine the efficiency of investment at the front end and back end of the contracting process, where we focus on litigation as the back-end stage. In deciding whether to express their obligations in precise or vague terms, contracting parties implicitly allocate costs between the front and back end. When the parties agree to vague terms (or standards), such as "best efforts" or "commercial reasonableness," they delegate to the back end the task of selecting proxies: For example, the court selects market indicators that serve as benchmarks for performance. When the parties agree to precise terms (or rules), they invest more at the front end to specify proxies in their contract, thereby leaving a smaller task for the enforcing court. We explore the choice between rules and standards in terms of this tradeoff, and we offer an explanation for why contracts in practice have a mix of vague and precise provisions. We then suggest that parties can achieve further contracting gains by varying the procedural rules that will govern their disputes in court. We illustrate by examining provisions in commercial contracts that allocate burdens and standards of proof. If the parties can improve the cost-effectiveness of litigation in this manner, they can further lower contracting costs by shifting more investment to the back end through their increased use of vague terms. Although vague terms have fallen into disfavor with contract theorists, this Article offers a justification for their frequent use in commercial practice.
More Equal than Others: Defending Property-Contract Parity in Bankruptcy
114 Yale L.J. 1099 (2005) Contracts create property; contractual rights and obligations are property. In bankruptcy, however, this aspect of nonbankruptcy law is often not recognized. This Note argues that bankruptcy law and policy should recognize the property in contract. This Note examines instances of inconsistency within the Bankruptcy Code and in bankruptcy courts' holdings to demonstrate how the acceptance of property-contract parity would lead to greater efficiency in prebankruptcy contracting, a stronger policy foundation for bankruptcy law, greater protection for valid party expectations, and less inequity between interested parties in bankruptcy proceedings.
Contract and Collaboration
113 Yale L.J. 1417 (2004) Promises and contracts establish relations among the persons who engage them, and these relations lie at the center of persons' moral and legal experience of one another. But the most prominent accounts of these practices nevertheless remain firmly individualistic, seeking to explain the obligations that such agreements involve in terms of one or another service that they render to the parties to them taken severally. This Article articulates a new theory of the philosophical foundations of promise and contract that reclaims for practical philosophy the relations among persons that promises and contracts create and that the dominant, individualistic accounts obscure. The Article proposes that promises and contracts establish relations of recognition and respect--and indeed a kind of community--among those who participate in them and explains the morality of promise and contract in terms of the value of this relation. Although the Article takes up promise quite generally, and proposes new solutions to familiar philosophical problems concerning the will's place among the grounds of promissory obligation, the Article emphasizes the particular case of contract, which it addresses in much greater detail. The Article argues that contract participates in the ideal of respectful community even though contracts typically arise among self-interested parties who aim to appropriate as much of the value that the contracts create as they can. The Article finds the peculiarly contractual variety of community directly in the form of the contract relation rather than in any substantive ends that the parties to contracts pursue. It presents a detailed account of the characteristic intentions that this form of community, which it calls collaboration, involves. The Article also emphasizes that contractual collaboration is no mere academic conceit but instead arises in actual legal practice. In particular, it considers two familiar doctrinal puzzles presented by the law of contracts--involving the consideration doctrine and the expectation remedy--in light of the collaborative values that it finds in the contract relation. It argues that the collaborative theory of contract underwrites a more satisfactory account of these doctrines than has so far been available. Finally, the Article concludes by suggesting that the collaborative ideal makes it possible to return contract, understood as a distinctive category of legal obligation, to the center of our legal system and to connect contract to broader principles that lie at the foundations of modern, pluralist, economic and political institutions. In addition to the legal theory of contract, the Article therefore also contributes to the political theory of the market and indeed of liberalism. Throughout the analysis, the Article applies a philosophical methodology that avoids casuistry, favoring an effort to elaborate the moral meanings of existing legal institutions and practices, and thus to reveal the moral relationships that are immanent in the law. This approach promises to connect moral philosophy to legal doctrine in a way that casuistic analysis cannot.
Contract Theory and the Limits of Contract Law
113 Yale L.J. 541 (2003) This Article sets out a normative theory to guide decisionmakers in the regulation of contracts between firms. Commercial law for centuries has drawn a distinction between mercantile contracts and others, but modern scholars have not systematically pursued the normative implications of this distinction. We attempt to cure this neglect by setting out the theoretical foundations of a law merchant for our time. Firms contract to maximize expected surplus, and the state permits markets to function because markets maximize social welfare. Thus, there is a correspondence of interest between firms and the state, which implies that, when externalities are absent, the state should implement the preferences of firms regarding the rules that regulate their contracting behavior. A contract law for firms would differ in three major respects from current contract law. First, such a law would have far fewer default rules and standards than current contract law contains. The high level of generality on which much contract law is written (e.g., a party must behave "reasonably") creates unacceptable moral hazard for parties subject to it. Thus, firms in theory should, and in practice commonly do, contract out of much of the law most of the time. The primary effect of today's law, therefore, is to raise transaction costs without altering substantive behavior--an effect that a law with fewer default rules and standards would avoid. Second, a contract law for firms would contain a default theory of interpretation that would require courts to base interpretations primarily on the written texts of agreements. The costs of incorrect interpretations that such a theory creates, we argue, would be more acceptable to firms than the costs that the courts' current interpretive practices create. Third, the law would contain almost no mandatory rules. To summarize, a modern law merchant would be much smaller than current contract law; would truncate broad judicial searches for parties' true intentions when interpreting their agreements; and would accord parties much more freedom to write efficient contracts than now exists.
Limits of Competition: Accountability in Government Contracting
112 Yale L.J. 2465 (2003) Government contracts with private providers for the supply of goods and services have grown in number and magnitude over the last several decades. Elected officials and other policymakers choose to privatize government functions for a variety of reasons. Politicians may want to appear to decrease the size of government by reducing the number of directly employed workers. Lawsuits challenging the quality of government services can motivate quick change, or private firms might lobby for government business. Some elected officials believe that private-sector provision of services always results in financial savings and better quality of service over public provision. Although in some instances the government unit involved conducts a serious study of the costs and benefits of privatizing, most privatization decisions in the United States result from a variety of motives and do not include serious study. Regardless of the motivation for privatization, the public and the relevant constituency retain an interest in monitoring privatized activities. Traditional legal checks on the procedural regularity and substantive rationality of government functions often do not apply to privatized services. Private contractors do not necessarily need to comply with statutory constraints on government, and even the process of privatizing often does not require formal procedures or reviews. In much of the literature on government contracts and in the views of many policymakers, these accountability concerns are not too troubling because competition for government contracts will provide the solution to these problems. Adherents to this model believe that the market for contracts will promote efficiency and that other methods of accountability are of minor importance, beyond legal enforcement of the contract terms. However, gaps in the existing analyses of government contracting compromise this theory. Studies of government contracting often fail to define accountability--and the structures that can promote or hinder accountability--with the depth necessary for analyzing the complex provision of government goods. Moreover, many of these analyses lack detailed empirical studies of the actual workings of contracting structures. This Note analyzes the accountability structures that do and should exist in contracting for government services and argues that the dominant competition model is extremely limited. The Note does not directly address the wisdom of privatizing as compared to government provision of goods and services. The use of contractors to provide government services is now widespread. This Note does present a caution to decisionmakers who believe that privatization simplifies the functions of government. The failure of a true market that promotes the efficient achievement of government goals requires an involved set of alternate accountability mechanisms that government must structure and administer. To support the claim of the limits of the competition model in government contracting, this Note uses the case of New York City's recent $800 million in contracts for child welfare services. New York City contracts out 20% to 25% of its production of goods, services, and City infrastructure to private bidders. In fiscal year 2000, the City spent $9.9 billion on just under 7000 procurement contracts. The City's child welfare agency, the Administration for Children's Services (ACS), awarded the largest amount of New York City contracts that year, with more than $800 million in contracts awarded for child welfare services. This Note has four Parts. Part II sets up a framework for analyzing accountability in government contracts. This Part analyzes what scholars and practitioners, struggling to shape new ways to hold private service providers accountable, call "multiple" and "overlapping" checks on the regularity and rationality of decisions. The Part presents a definition of accountability using public and constituent input to shape reasonable, timely, and fair decisions leading to reasonably effective service outcomes. It also outlines the competition model in which the market cabins agency and contractor discretion. This Part then reviews other potential sources of accountability including legal constraints, hierarchical requirements, professional norms, public and constituent participation, and political processes. The Part creates a working typology that exposes the redundancy of some of these structures and begins to discuss the ways these structures have worked in other studies, stopping short of drawing conclusions about the operation of such structures in a large, complicated procurement system. After developing a framework for determining accountability, the Note uses the case of child welfare services in New York City to analyze the way these accountability structures do and should work in an actual procurement. Part III of this Note examines New York City's recent child welfare procurement and attempts to fit ACS's system into a competitive model. The procurement process at ACS involved an unusually high number of bidders for government contracting and an extraordinarily experienced and knowledgeable bidding community. Even with the presence of formal elements of competition exceeding that found in many other studies of government procurement, the "market" for most of the services solicited by the City remained closed to new competitors. The primary claim of this Note is a challenge to the dominant competition model of government contracting. However, this Note does not abandon the question of accountability in government contracts after making this pessimistic claim. After analyzing the limits of the competition model using a case that contains many of the formal elements of competition, Part III analyzes other potential sources of accountability in public contracting systems and argues for an integrated accountability system that does not depend on any one structure for system-wide accountability. Part IV concludes this analysis by summarizing the challenges that the case of ACS poses to the competitive model of government contracting and by presenting, in a unified manner, the ideal framework of accountability structures argued for in this Note. The Note resists picking one structure of accountability as a cure-all. Such a simple conclusion would repeat the failure of the competition model, which purports to be a closed system without need for other structures of accountability. Rather, this Note argues that an accountable public contracting system must rely on the interaction of multiple structures of accountability. An accountable system would promote professionalism among agency staff and among contractors, create structures for meaningful public input, and engineer measurable evaluations of contracts. Hierarchical and political structures of oversight are necessary in minimal amounts, and are often unavoidable, but would be streamlined and cabined in an ideal system of accountability. The precise implications for law and policy of the ideal framework of accountability proposed here depend on the context of the particular contracting system. The framework argued for in this Note, however, provides a background for structuring systems of accountability that do not depend solely on the dubious promise of competition in public contracts.
Unions and the Duty of Good Faith in Employment Contracts
112 Yale L.J. 1881 (2003) Some American scholars of law and economics have expressed dismay at the anticompetitive and illiberal body of legal doctrine that is labor law. Their respondents, often in other fields if not other countries, have defended unions and the laws that support them on both economic and ethical grounds. On the one hand, unions may contribute to efficient workplace governance and correct the monopsony power of employers in imperfect labor markets. On the other hand, by increasing workers' bargaining power vis- -vis firms, unions may effectuate distributive social policies by winning workers a larger fraction of firms' surplus. By affording employees more control over their work, unions may also leave them less alienated in the production process. I will offer another account of the function of labor law that appeals to both efficiency and equity principles: Unions correct for the unique opportunities for bad faith in the employment relationship. The duty of good faith is a background condition imposed on all contracts that limits the negative effects of unequal bargaining power, but its enforcement is particularly challenging in the context of most employment relationships. I will argue first that the duty of good faith is not self-enforcing between worker and firm. I will then argue that third-party enforcement is not a viable alternative. Finally, I will present unions as an institutional means by which the duty can be enforced at low cost, and compare the American and German systems as variations on that possibility. In Germany, collective bargaining remains the predominant means by which the employment relationship is regulated. By contrast, in the United States, the decline of unionism has been matched with a rise in administrative regulation. Although collective bargaining is not without its own difficulties, substantive standards are neither an efficient nor a complete response to the problems of good faith explored in this Note. My account of the role that labor law plays in the employment relationship is consistent with other sympathetic accounts. In fact, there is substantial overlap insofar as much of the employer behavior that results in inefficient or inequitable bargains for workers can be characterized as bad faith. The argument here differs from those dominant in the existing literature, however, in two respects. First, the problem it addresses is not just economic but also legal. Evaluating the individual employment relationship from the standpoint of contract law sheds light on the dilemmas courts face in the absence of collective bargaining. The alternative to collective bargaining principles is not, after all, an unregulated labor market. All employment contracts are subject to certain universal, immutable contract rules, including the duty of good faith. The inadequacy of individual employment contracting reflects legal as well as market failure. Understanding employment contracts as legal as well as economic instruments is more foreign to the literature than one would expect. The tools of economics do incorporate problems of interpretation, but they are incorporated as transaction costs not qualitatively different than the cost of paper; the purpose of economic analysis is to assess contractual efficiency. Political and ethical analysis of the employment relationship, on the other hand, ultimately appeals to fairness--for example, in the form of norms about control, distributive justice, or property rights. No commentator can be fairly assigned to one camp or the other, since no argument that fails to address both fairness and efficiency is plausible. Torn between two isolated principles, observers can do little more than strike an (ultimately subjective) balance between these competing values. The advantage of a self-consciously legal analysis, focused on the challenges posed by employment contracts from the perspective of lawyers, is that these values have already been incorporated into a single framework: the common law. For example, these values are two interpretive aspects of the duty of good faith, which cannot properly be understood without reference to both. Although the common law no longer governs many terms of employment, due to both collective bargaining and an array of employment legislation, it nevertheless provides a useful framework by which to assess the difficult task any alternative legal regime must perform. My second departure from prevailing accounts lies in an attempt to assess the interaction between an inequality of bargaining power, on the one hand, and information and monitoring costs, on the other. Bargaining power is an important part of the story behind the intervention of labor law, but it is only part of that story. It interacts with other features of the employment relationship to complicate workers' capacity to protect their interests on an individual basis. Standing alone, the consequences of bargaining-power disparity are not obvious; although all else equal it will result in a less equal distribution of the gains of trade, the weaker party's loss could be offset by her (albeit small) share of transaction-cost savings. If employers and employees were equally invested in each other, they would be situated in a bilateral monopoly. This normally results in high bargaining costs because each party knows that the other cannot easily go elsewhere. In the employment context, however, workers cannot afford to hold out inefficiently and prolong negotiations about each exercise of discretion by the employer that the worker considers a modification of the original contract. Unequal bargaining power means less bargaining, and where bargaining is costly, workers' absolute share of transaction-cost savings may offset a decline in their relative share of total gains from the employment contract. Clear legal allocation of discretion to the employer may have the sanguine effects associated with bright-line property entitlements (as opposed to fuzzy entitlements protected by liability rules). Unequal bargaining power may also reduce transaction costs and underinvestment by workers and employers if discretion and penalties are specified contractually at the outset. Some commentators suggest that parties can anticipate attempts to renegotiate or shirk by allocating all discretion to one party and providing for a positive default level of trade or employment. Workers may underinvest or demand renegotiation if, as a result of employer exercise of discretion, their returns to investment (effort, years, training) decline over time. If their contract, however, guarantees them some default "average" employment terms, they are more likely to invest--in the event of employer abuse, they can invoke those inflexible terms. Employers have incentive to agree to such defaults, even where they have all the bargaining power, as a mechanism to reduce shirking. Although the background problem of shirking recognizes that effective monitoring is impossible, this model of efficient bargaining inequality presumes that parties are able to specify efficient and enforceable default terms. A final benefit of bargaining-power disparity may result if employer discretion increases production quality and flexibility; workers' wage gains may eventually reflect their increased marginal productivity. While this implies that workers would voluntarily curb their demands even if they had bargaining power, they might not if their short-term loss was certain while their wage gains depended on other workers similarly cooperating. The concentration of decisionmaking in the employer resulting from its bargaining power could effectively resolve a collective action problem among workers. The indirect effects of unequal bargaining power therefore complicate its aggregate effect on workers' returns. But its indirect effects do not all lower transaction costs. The costs of information gathering and monitoring are actually greater in the face of an imbalance in bargaining power. Moreover, the costs are more likely to be borne by workers because of this imbalance. In the following discussion, I introduce a number of stylized assumptions about the labor market. Not all labor markets are characterized by the imbalance of bargaining power and high transactions costs discussed here. The costs of information and monitoring vary and are not always borne by the employee. For example, law students working at corporate law firms are provided with information few workers could assemble on their own. And at least when they start, entrants into the law job market appear to enjoy substantial bargaining power. It is not surprising, then, that law students do not organize themselves into unions. The same is true to varying degrees of most professions. When employers invest in individual employees and employees are mobile--due to high skills, tight labor markets, or a strong social wage (government-provided safety net)--much of the argument does not apply. In the labor markets I have in mind, employees' work products are fairly homogenous and a single firm employs a large number of people engaged in similar work. This applies to much of the manufacturing sector and a significant portion of the low-skilled service sector. In these labor markets, nonunionized workers are "price takers"--employers can always find ready substitutes at their named price. Under these conditions, workers do not have a credible threat of exit for any but the grossest of employer abuses; they lack credible, graded threats with which they can respond to lesser violations. These are essentially the markets in which unions have historically been active. The argument here is intended to explain the role that unions play and may be used to predict which markets will be most receptive to unionization; I am not making any empirical claim about the proportion of the total work force to which these assumptions apply. But I expect that the duty of good faith is self-enforcing in those markets in which these assumptions do not apply, and as expected, unions have the least market presence in these sectors.
Economic Analysis of Contract Law After Three Decades: Success or Failure?
112 Yale L.J. 829 (2003) Modern economic analysis of contract law began about thirty years ago and, many scholars would agree, has become the dominant academic style of contract theory. Traditional doctrinal analysis exerts less influence than it did prior to 1970 and enjoys little prestige. Philosophical work on the nature of promising has captured some attention, but petered out in the 1980s, with little to show for the effort other than arid generalizations about the nature of promising. Academic critiques from the left no longer stir up excitement as they did twenty years ago. Scholarship influenced by cognitive psychology has so far produced few insights. Only economic analysis seems to be on solid footing. One way to validate a field's claims is to look at its history. Economically oriented scholars writing in the early 1970s had foundational insights, and then over time subsequent writers have criticized and refined them; because these refinements were derived from common premises, there has been a sense of forward movement in the subject, of the building of an increasingly sophisticated consensus. Although critics of economic analysis deride its scientific aspirations, the steady accumulation of insights over time resembles scientific progress. Doctrinal, philosophical, and critical scholarship by contrast has been static. The authors agree or disagree, and about the same things, as much today as they did twenty or thirty years ago. Yet there are grounds for concern about the economic analysis of contract law. Careful students of its history know that the sense of convergence ended years ago; in the last ten years, theory has become divergent, and impasses have emerged. The simple models that dominated discussion prior to the 1990s do not predict observed contract doctrine. The more complex models that emerged in the 1980s and dominated discussion in the 1990s failed to predict doctrine or relied on variables that could not, as a practical matter, be measured. As a result, the predictions of these models are indeterminate, and the normative recommendations derived from them are implausible. For these reasons, I will argue that economic analysis has failed to produce an "economic theory" of contract law, and does not seem likely to be able to do so. By this, I mean that the economic approach does not explain the current system of contract law, nor does it provide a solid basis for criticizing and reforming contract law. This is not to say that the economic approach has not produced any wisdom, but that the nature of its accomplishment turns out to be subtle and will become clear only after an extended discussion. This Essay has two purposes: to document the failures of economic models to explain contract law or to justify reform, and to provide an explanation for these failures. The explanation centers on the difficulty of developing a model of contractual behavior that can be tested and that does not make unreasonable assumptions about the cognitive abilities of contractual parties. At the outset, a few comments must be made in order to avoid some possible misunderstandings of the argument. First, I will not argue that some other approach to contract law is superior to the economic approach, nor that economic analysis should be abandoned. If a moral must be extracted from the discussion, it is skepticism about how much additional value economics has to offer to understanding contract law today. Second, I do not make claims about the value of economic analysis for understanding other areas of law. Indeed, my critique rests on empirical and methodological judgments about the contracts literature, judgments that do not necessarily apply to, say, torts or property. Nor do I take a position in this Essay on controversies over the welfarist foundations of economic analysis. Third, I want to avoid making general arguments about what counts as a good theory. One might argue that any methodology that yields surprises or insights about a familiar topic is valuable, and those surprises or insights should be counted as theories. To avoid these philosophical issues, I will focus on the original aspirations of the economic analysis of contract law: to provide an explanation of existing legal rules, and to provide a basis for criticizing or defending those rules. Finally, I want to avoid debates about what counts as "economic analysis of contract law" by stipulating that it did not exist before 1970. This is, of course, artificial. Many earlier scholars, including Holmes, Llewellyn, Hale, and Fuller, used economic analysis in the sense that from time to time they would assume that contracting parties are rational and then speculate about how different legal rules would affect these parties' incentives. From a modern perspective, however, their insights seem banal, and that is because post-1970 economic analysis is more systematic and careful. The interesting question is whether the post-1970 commitment to methodological individualism and the other premises of the rational actor approach provide the basis for a theory that can be used to explain or criticize contract law. My plan is as follows. Part I describes various results from the economic analysis of contract law and compares them with the legal doctrine. In virtually every case, models make either false or indeterminate predictions about the doctrines of contract law. Part II discusses the closely related literature on incomplete contracts, a literature that attempts to predict the content of contracts, as opposed to contract law. The separation of these two bodies of scholarship, now gradually disappearing, is an accident of history, but useful for seeing the general problems with the economic project. Part III speculates about what went wrong with economic analysis and argues that an ambiguity at the heart of the concept of transaction costs is to blame. Part IV looks at trends in contracts scholarship. Part V criticizes alternative approaches to contract theory.
In That Case, What Is the Question? Economics and the Demands of Contract Theory
112 Yale L.J. 903 (2003) In his thoughtful essay, Eric Posner asks whether economic analysis has failed contract law and suggests that it has. Not surprisingly, I hold a different opinion. That is, while I agree with much of what Posner says about particular economic findings, I disagree about what it would mean for economics to "fail" (or, for that matter, what it would mean to succeed). More specifically, Posner argues that economic analysis has failed in two respects, both as a descriptive theory and as a normative one. Descriptively, Posner says, economics fails to predict existing doctrine: Either existing doctrine differs from the rules that economics identifies as efficient, or economics is too indeterminate to identify the most efficient rules. And normatively, Posner says that this same indeterminacy also prevents economics from making any suggestions for the reform of contract law. On my view, though, the descriptive and normative issues (and what constitutes "failure" for each of these purposes) must be treated separately. The descriptive claims that might be made for economics are largely uninteresting, as most scholars have implicitly recognized. I will speak briefly about those claims in Part I of this Response, but the bulk of my comments--Part II--will concern the normative claims. To the extent that normative analysis is at issue, I am much less troubled by indeterminacy of the sort that Posner describes. I then address, in Part III, the very different demands of what might be called an "interpretive" theory of contract law. In short, my differences with Posner are largely over the question of "what counts as a good theory" of contract. Posner wisely declined to address that question--wisely, I say, because a full discussion could easily have tripled the length of his essay. My goal in this Response, though, is to put that issue back on the table, for this is where most of our differences can be found.