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合同法: 一般理论

 

Abstract

When contracts are incomplete, the law must rely on default rules to resolve

any issues that have not been explicitly addressed by the parties. Some default

rules (called ‘majoritarian’ or ‘market-mimicking’) are designed to be left in

place by most parties, and thus are chosen to reflect an efficient allocation of

rights and duties. Others (called ‘information-forcing’ or ‘penalty’ default

rules) are designed not to be left in place, but rather to encourage the parties

themselves to explicitly provide some other resolution; these rules thus aim to

encourage an efficient contracting process. This chapter describes the issues

raised by such rules, including their application to heterogeneous markets and

to separating and pooling equilibria; it also briefly discusses some non-

economictheories of default rules. Finally, this chapter also discusses economic

and non-economic theories about the general question of why contracts should

be enforced at all.

JEL classification: K12

Keywords: Contracts, Incomplete Contracts, Default Rules

 

1. Introduction

 

This chapter describes research bearing on the general aspects of contract law.

Most research in law and economics does not explicitly address these general

aspects, but instead proceeds directly to analyze particular rules of contract law,

such as the remedies for breach. That body of research is described below in

Chapters 4100 through 4800.

 

There is, however, some scholarship on the general nature of contract law’s

‘default rules’, or the rules that define the parties’ obligations in the absence of

any explicit agreement to the contrary. The phrase, ‘complete contingent

contract’ is sometimes used to describe an (imaginary) contract that would spell

out in complete detail the exact legal rights and duties of each party under

every possible state of affairs. While no real contract ever achieves this level of

completeness, the concept is still useful to define one endpoint of a spectrum

of completeness. If any contract ever succeeded in reaching this endpoint, the

law’s default rules would then be irrelevant, as no issue would ever arise that

could not be settled by the terms of the contract itself. Indeed, the same is true

of the interpretation of most other legal documents, such as wills (see Chapter

5830) or legislative enactments (see Chapter 9200).

 

 

As long as legal documents fall short of this level of completeness, the law

must have some set of presumptions or default rules, in order to resolve

disputes that are not settled by the terms of the document itself. The law could,

of course, simply refuse to enforce any contract (or any will, or any statute) that

fell short of absolute completeness. But such a rule would itself be a ‘default

rule’: it would be a legal rule defining the obligations (or lack of obligations)

that result when a contract does not itself specify what rules should govern. As

long as actual contracts fall short of full completeness, then, the existence of

default rules is not so much a choice as a logical necessity. The only question

is what the content of those default rules ought to be.

In choosing the content of default rules for contractual relationships, it is

often useful to distinguish default rules chosen to increase efficiency if they are

allowed to remain in force (as discussed in Sections 2-4) from those chosen to

increase efficiency if many parties contract around the default rule (discussed

in Sections 5-9). In some cases, the steps required to contract around a default

rule could themselves increase efficiency, by inducing one party to reveal

private information (as discussed in Sections 6-8). In other cases, it may be too

hard for the law to identify a single rule that would increase efficiency if

allowed to remain in force, so the default rule may instead be selected purely

for its simplicity or ease of administration (as discussed in Section 9). The

choice between these approaches depends in part on the ability of courts or

lawmakers to identify efficient default rules; this issue is addressed in Section

10. The possible effect of default rules on the parties’ own preferences is

discussed in Section 11, while Section 12 discusses some non-economic

theories of default rules.

 

Finally, there is also a good deal of scholarship on the general question of

when contracts ought to be enforceable, either through informal social

sanctions or more by formal legal mechanisms. Section 16 introduces these

issues, and discusses the choice of enforcement mechanisms. Sections 18-20

focus on the question of whether promises should be enforceable at all

(whatever the mechanism), with Section 18 discussing noneconomic theories

of enforcement and Sections 19-20 discussing the economic theories.

 

A. ‘Majoritarian’ or ‘Market-Mimicking’ Default Rules

 

2. Introduction to Majoritarian Default Rules

 

One way to select a default rule is to identify the rule that would be most

efficient if that rule were allowed to remain in place (for example, if the parties

did not specify some other rule in their contract). For example, if the

expectation measure of damages were determined to be the most efficient

remedy for breach of contract, this approach to selecting a default rule would

argue for making expectation damages the default remedy.

 

Much of the economically-oriented research on specific topics of contract

law falls into this category. For example, many analyses of the remedies for

breach aim to identify the remedy that would produce the most efficient result

if that remedy were allowed to govern the parties’ relationship (for example, if

the parties’ contract did not stipulate that some other remedy would govern).

The same is true of many analyses of implied excuses such as impracticability

and mistake, or of other terms such as implied warranties. This work is

described at more length in Chapters 4500 (unforeseen contingencies), 4600

(remedies), and 4700 (warranties). This section addresses only those issues

common to all default rules of this sort.

 

3. Majoritarian Rules and Hypothetical Consent

 

Default rules selected on this basis - that is, on the grounds of their efficiency

if allowed to remain in force - are sometimes described as the rules that the

parties themselves would have chosen, if they had taken the time to agree

explicitly on a rule to govern their relationship. In most cases, parties to a

contract have an interest in maximizing the efficiency of their relationship, so

the rule the parties themselves would have chosen will be the same as the rule

that would be most efficient if allowed to remain in place. Thus, default rules

chosen on this basis have also been labeled ‘market mimicking default rules’,

or default rules based on the principle of ‘hypothetical consent’. To be sure, if

there are third-party effects, or if the parties to the contract are imperfectly

informed or are subject to any other market failures, the rule that would be

chosen by the actual parties might no longer coincide with the rule that would

in fact be most efficient. For general discussions of the relationship between

efficient default rules and hypothetical consent, see Posner and Rosenfield

(1977, p. 89), Ayres and Gertner (1989, pp. 89-93), Coleman, Heckathorn and

Maser (1989), and Craswell (1992). Section 4 discusses some additional

Complexities that arise in heterogeneous markets, in which the same rule would

not be chosen by every pair of contracting parties.

 

This basis for selecting default rules has been supported by two economic

arguments, both of which involve transaction costs. (Some noneconomic

arguments will be discussed in Section 12 below.) The first economic argument

applies when it would be prohibitively expensive for the parties to make their

contract more complete by specifying the rule they want to govern a particular

contingency. This is especially likely for extremely low-probability

contingencies, where the expected benefits of specifying a rule in advance are

likely to be low. In such a case, any rule the law selects as a default rule will

inevitably be left in place by the parties, so the only way to get the benefits of

whatever rule is most efficient is to make that rule the default rule. The second

economic argument applies if it would be costly, but not prohibitively

expensive, for the parties to make their contract more complete by specifying

their own rule. In such a case, selecting a default rule that matches whatever

rule the parties prefer may save some parties from having to incur those

transaction costs, thus producing all the benefits of the most efficient rule with

lower total transaction costs.

 

These arguments become more complicated, however, if a ‘market-

mimicking’ default rule is being applied to a market that is imperfect in some

respect. For example, if a remedy of expectation damages would in fact be most

efficient, but if imperfect information has led the parties to believe that some

other remedy would be more efficient, should the law adopt as its default

remedy the one that is in fact most efficient, or should it adopt the less efficient

remedy that the (imperfectly informed) parties would choose if left to their own

devices? The transaction-cost argument discussed in the preceding paragraph

could suggest that, if the cost of contracting around the default rule is

sufficiently low that the parties are likely to do so, then the law might as well

adopt the less efficient remedy as the default rule, because that is the remedy

the parties will contract for anyway. Alternatively, if the costs of transacting

around the default rule are so high that the parties are likely to leave the default

rule in place, perhaps the law should adopt the remedy that in fact is most

efficient, as that will give the parties the benefit of the more efficient rule. But

this latter approach is complicated by the fact that the identity of the rule that

is most efficient (if allowed to remain in force) may itself change if the parties

are imperfectly informed, or if there are other market imperfections. Moreover,

in some cases the presence of information asymmetries or other market

imperfections may call for an entirely different approach to the selection of

default rules, in which the default rules are intentionally chosen not to be left

in force by many parties. This approach is discussed below in Sections 5-9.

 

4. Majoritarian Rules in Heterogeneous Markets

 

Market-mimicking or ‘majoritarian’ default rules raise additional issues in

markets characterized by heterogeneity, where different rules would be efficient

for different contracting pairs. If a single default rule must be chosen to govern

all contracts in such a market, the rule selected will determine which

contracting pairs can do best by leaving the default rule in place and which

pairs could potentially do better by incurring the transaction costs needed to

specify some other rule. It is sometimes assumed that the most efficient single

default rule would be that which was most efficient for most of the contracting

pairs (hence the label ‘majoritarian’ default rule, coined by Ayres and Gertner,

1989). But if transaction costs differ across heterogeneous parties, this

conclusion actually depends on the exact levels of transaction costs that each

member of each contracting pair would have to incur to contract around

whatever default rule the law adopts (see Ayres and Gertner, 1989, pp. 112-

115).

 

If different rules would be efficient for different contracting pairs, the law

must also to decide the extent to which its default rules should be ‘tailored’, or

customized to match the rule that would be most efficient for each individual

contracting pair (see Ayres, 1993; Goetz and Scott, 1985; Baird and Weisberg,

1982). If the law adopts a single, untailored default rule, that will be most

efficient for only some of the contracting pairs: all other pairs will have to incur

either (1) the transaction costs of contracting around the default rule, or (2) the

efficiency loss from leaving in place a default rule that is less than efficient for

their contract. A set of default rules tailored to each individual contracting pair

can in theory eliminate or reduce these costs, but such ‘tailoring’ will usually

introduce other costs. For instance, individually tailored rules will usually be

more complex, thus increasing the drafting costs that must be incurred by the

legislature or other lawmaking body. Moreover, it is often impossible to spell

out a complete set of individually tailored rules in advance, so the law will

instead have to rely on vague standards to be applied by courts on a case-by-

case basis (for example, an implied excuse in cases where performance is no

longer commercially ‘reasonable’). Vague standards such as these usually entail

higher litigation costs; they also introduce the possibility of case-by-case error

in the application of the standard, and may make it hard for the parties to

predict what rule will be applied to their relationship. In short, the question of

how finely to tailor a default rule - and, indeed, whether to tailor it at all -

raises most of the same issues that are raised whenever the law faces a choice

between specific rules and vague standards (see Chapter 9000).

 

B. ‘Information-Forcing’ or ‘Penalty’ Default Rules

 

5. Introduction to Information-Forcing Default Rules

 

In many transactions, the two parties begin with differing amounts of

information. In some cases, they may be differently informed about the relevant

legal rules, or about the risks involved in the transaction. They may also be

differently informed about the characteristics of the other party - for example,

the seller may not know how much the buyer will lose if the seller’s product

turns out to be defective. Differences such as these are often referred to as

 ‘information asymmetries’. While information asymmetries are often addressed

directly through disclosure regulations and the like (see Chapter 5110), they

can also have implications for the law’s choice of default rules. Section 6 below

discusses cases where the two parties are differentially informed about the

governing legal rule. Sections 7-8 then discuss cases where the two parties are

differentially informed about some other aspect of the transaction.

 

6. Forcing Information about the Legal Rule

 

In some cases, the choice of default rule may help correct one party’s

information about the legal rule itself. For example, suppose that the default

remedy for breach provides for only a small monetary payment. Suppose also

that the seller (the potential breacher) knows this, but the buyer (the potential

nonbreacher) does not. Suppose that the buyer instead thinks, incorrectly, that

the law’s default rule provides for a very large payment in the event of breach.

 

If left uncorrected, this information asymmetry could lead to either of two

problems. First, if a larger remedy would be more efficient for this contracting

pair, they may not alter their contract to provide for the larger and more

efficient remedy, because the buyer will think that he or she already has the

benefit of a larger remedy. Second, even if the smaller remedy provided by the

default rule is in fact most efficient for this contracting pair, the buyer’s

ignorance about the actual rule may keep him or her from optimally adapting

his or her behavior to that rule. For example, the buyer may purchase

insufficient insurance, or take insufficient precautions to reduce the losses that

would be caused by breach. (The effect of legal remedies on the incentives

governing decisions such as these is discussed at more length in Chapter 4600.)

 

By contrast, suppose now that the default rule were changed to provide for

a very large payment in the event of breach. If this remedy is left in place, that

is, if the parties do not contract around it), then both parties will optimally

adapt their behavior: the buyer will adapt because this rule matches what he or

she thinks the rule is; while the seller will adapt because, by hypothesis, he or

she is correctly informed about whatever the default rule is. And if this default

remedy is not left in place (that is, if the parties contract around it by

stipulating a smaller remedy), the act of stipulating some other remedy should

serve to inform the buyer about what remedy will apply in the event of breach.

Indeed, if the default rule is one that the parties will be certain to contract

around- for example, if it is chosen to be highly unfavorable to whichever party

is better informed about the law - that will virtually ensure that the other party

will also become correctly informed about the resulting rule, by the very process

of stipulating to some other rule in their contract. Hence, these default rules are

sometimes described as ‘information forcing’ rules (Scott, 1990, p. 609), or as

 ‘penalty defaults’ slanted against the better-informed party to induce him or her

to contract around the default rule (Ayres and Gertner, 1989, p. 97). A number

of analyses of particular topics in contract law have recommended default rules

chosen on this basis, or have suggested that actual legal rules could be

understood as serving this function. See, for example, Ayres and Gertner (1989,

pp. 98-99, 104-106), Goldberg (1984, pp. 295-296), Muris (1983, p. 390),

Verkerke (1995, pp. 885-890), Isaacharoff (1996, pp. 1793-1795).

 

One difficulty raised by default rules slanted against the better-informed

party is that it may not be clear which party is better informed. This raises

another ‘tailoring’ question of the sort discussed above in Section 4: should the

party against whom the default rule is slanted be determined in advance for a

broad category of cases, or individually on a case-by-case basis?

 

Another difficult issue, even in cases where it is clear which party is least

well-informed, concerns the comparison between the benefits and the costs of

correcting the information asymmetry. The benefit of correcting the asymmetry

will vary from case to case, depending on the information involved, so it is

difficult to generalize. The costs of correcting the asymmetry clearly include the

direct costs of contracting around the original default rule (which will depend

in turn on the procedures that are required to contract around a default rule, as

discussed in Section 14 below). The costs of correcting the asymmetry also

depend on the risk that the parties will simply forget to contract around, thereby

unintentionally leaving in force a default rule that was chosen not to be efficient

for these contracting parties.

 

7. Forcing Information about the Other Contracting Party

 

In many markets there is heterogeneity among the potential parties on a single

side of a proposed transaction. For example, sellers may differ in the reliability

of their products, or buyers may differ in the losses that they would suffer if the

product they purchase fails to perform. At the outset of the transaction, this

information is often known to one party but not to the other - for example, each

buyer may already know how much loss he or she would suffer, but sellers may

have no way of knowing how much any individual buyer has at stake. This is

another example of information asymmetry.

 

When this asymmetry is present, contract law’s default rules can again

create incentives for one party to take actions that will reveal information to the

other party. For example, if the default remedy for breach of contract provides

for only a small monetary payment, buyers who would lose a larger amount in

the event of breach may have an incentive to try to contract around that rule,

by negotiating for a clause stipulating a larger payment in the event of breach.

By contrast, if the default remedy is already set at a larger payment, buyers who

would lose less may be the ones with an incentive to contract around that rule,

by negotiating for a smaller stipulated damage to get a more favorable price).

In other words, the choice of default rule will determine which set of buyers -

buyers with little at stake, or buyers with lots at stake - have an incentive to try

to contract around the default rule. As a result, sellers may be able to infer

something about the amount that any given buyer has at stake by observing

whether that buyer does or does not try to contract around the default rule. And

if buyers also differ in the gains they would get from transacting around the

default rule, or in the costs they would face in doing so, the resulting

equilibrium may depend critically on which default rule the law adopts. (The

welfare consequences of these differences are discussed below in Section 8.)

 

These differences are often analyzed using signaling models from game

theory (see generally Chapter 0550). If sellers have no information about how

much any given buyer would lose in the event of breach, the result may be a

pooling equilibrium in which all buyers are charged an identical price. But if

this asymmetry can somehow be overcome, the result may be a separating

equilibrium in which buyers who face large losses in the event of breach will

have a right to collect those losses, but will pay a higher price (to compensate

the seller for its greater potential liability), while buyers who face lower losses

will pay a lower price. One way to achieve this separating equilibrium is to

select a default rule that induces one of these classes of buyers to signal the

amount they have at stake, by their actions in trying to contract around the

default rule. For formal models of this effect see, for example, Ayres and

Gertner (1989, 1992), Johnston (1990), Allen and Gale (1992), Hviid (1996).

 

8. Information-Forcing and Economic Welfare

 

Unfortunately, it is often difficult to assess the welfare implications of default

rules that produce separating equilibria. Part of the difficulty is that, while there

will usually be efficiency gains from eliminating this information asymmetry,

that will not always be the case. Gains could arise if information about each

individual buyer’s potential losses may let some sellers make customized

adjustments to the reliability of their products. Gains could also arise if this

information let sellers calculate a price that better reflected the true risk of

selling to that particular buyer, thus sending buyers the correct signals about

whether to purchase that product (see Ayres and Gertner, 1989; Quillen, 1988).

In some cases, though, information about the buyer’s potential losses may be

of no relevance to sellers - as, for instance, when sellers operate mass

businesses that cannot practicably adjust their actions or prices for individual

buyers (Danzig, 1975; Eisenberg, 1992, pp. 591-596). In such markets, there

will be no efficiency gains at all from curing the information asymmetry. In

still other markets, there may be positive gains from curing the asymmetry but

those gains may not outweigh the costs of communicating the necessary

information (Bebchuk and Shavell, 1991).

 

Moreover, even when net efficiency gains are possible, the parties’ private

incentives may lead them to act in a way that fails to achieve those gains. For

example, if buyers face a price-discriminating monopolist who can charge

higher prices to buyers who have more at stake in a particular transaction,

buyers may be reluctant to do anything to reveal the amount they have at stake

for fear of having to pay a higher price (Wolcher, 1989; Johnston, 1990; Ayres

and Gertner, 1992). In other cases, some buyers may get private benefits (such

as a more favorable price) by distinguishing themselves from other buyers, thus

leading to socially excessive signaling (Rea, 1984; Aghion and Hermalin,

1990). At present, it is difficult to generalize about when the signaling or

separating effects of a default rule will improve overall efficiency (see Hviid,

1996).

 

9. ‘Formalities’ as Default Rules

 

Still another approach to selecting default rules aims entirely at ease of

administration. That is, rather than trying to identify the default rule that would

(1) be most efficient if left in place, or would (2) induce an efficient disclosure

of information, this approach aims for default rules that are easily administered

by courts, and easily learned and understood by contracting parties. In an

influential early article, Fuller (1941) coined the term ‘formality’ to refer to

rules designed to induce parties to specify their intentions in a way that could

easily be recognized by courts. In this respect, Fuller’s rules were designed to

force the parties to disclose information to the court, rather than (or in addition

to) forcing one party to disclose information to the other contracting party.

 

For example, if the parties to a contract fail to specify the quantity of goods

they intend to convey, many jurisdictions refuse to enforce any obligation

whatsoever, thus implicitly filling the gap with a quantity of ‘zero’ (see Ayres

and Gertner, 1989, pp. 95-96). This default rule clearly is not designed to

match what any contracting pair would have intended anyway. Instead, its

purpose is to induce each pair to contract around the default rule by specifying

the quantity they prefer, thus sparing the court from having to guess about the

parties’ preferred quantity. Thus, unlike majoritarian or market-mimicking

default rules, formalities are not necessarily intended to be left in place by the

parties.

 

Unlike other ‘penalty’ or ‘information-forcing’ rules, however (see Sections

5-8), formalities need not be slanted against any particular party. For example,

the default rule for contracts that fail to specify any quantity of goods could just

as easily be set at any specific number, not necessarily zero. True, a default rule

of ‘zero’ has certain administrative advantages over any other number: there

is no way to breach an obligation to deliver a quantity of zero, and hence no

need to ever measure damages. Still, the essential feature of a formality is

merely that some number be fixed in advance and be easily learnable by the

parties, so that they can determine whether they will have to specify some other

number in their contract. The formality could even be set at the number that

most parties would prefer (if that number were known), thus giving it one

feature in common with a market mimicking or majoritarian default rule. The

only key is that, since formalities are chosen for their simplicity and ease of

administration, they will necessarily be ‘untailored’ in the sense defined earlier

in Section 4. As a result, no matter what specific rule is adopted as the default

formality, many (perhaps most) contracting pairs will find it in their interest

to specify some other rule in their contract.

 

Because formalities are designed to be easily administered, they will at least

have the virtue of reducing litigation costs in all cases when the parties fail to

specify some other rule in their contract, so the default rule remains in effect.

This same ease of administration may also minimize another component of

transaction costs: the cost to the parties of becoming informed about the legal

rule, and of predicting how that rule might be applied. Also, if the formality is

not chosen to be deliberately unfavorable to either party, it may reduce the costs

imposed when parties forget to specify some other rule in their contract: in this

way, formalities may reduce the cost of remaining uninformed about the law.

(These two effects have offsetting influences on parties’ incentives to become

informed about the law.)

 

C. Other Issues in Designing Default Rules

 

10. Default Rules and Institutional Capabilities

 

The preceding sections have discussed three bases on which default rules might

be selected: market-mimicking or majoritarian defaults (Sections 2-4),

information-forcing or penalty defaults (Sections 5-8), and pure formalities

(Section 9). The choice among these various approaches depends in part on the

competence and capabilities of legal institutions. For example, the first two

approaches - market mimicking or majoritarian defaults, and information-

forcing or penalty defaults - place obvious demands on those institutions, either

to identify the rule that would in fact be most efficient (if left in place) for most

contracting pairs, or to identify the default rule that would induce the most

efficient disclosure of information. These demands are only increased if either

of these approaches is to be adopted on a relatively ‘tailored’ basis, requiring

the legal decision makers to assess the effect on individual markets or even

individual contracting pairs. Thus, it is obviously an oversimplification to

analyze how either of these approaches would work if it were to be

administered by an omniscient legal decision maker. The real question is how

well either of these approaches will work when administered by actual courts

and legislatures.

 

Two views of this question have developed in the contracts literature. The

first begins by positing that certain rules - often, the rules that would have been

efficient in a first-best world with perfect legal institutions - are simply beyond

the capability of real legal institutions. This assumption is often made when the

rule in question depends on information that, although observable by one or

even both of the parties, cannot be demonstrated or verified publicly in court.

For example, if the default remedy for breach were based on the net profits the

breacher made, this would require a court to be able to measure the breacher’s

revenues and costs, which might in some cases require more accounting

expertise than real courts possess. Scholars often posit that such a rule would

be unworkable in order to focus their analysis on alternative rules: rules that,

while they might be less efficient in a first-best world, place fewer demands on

the court or other legal decisionmaker (for example, Hermalin and Katz, 1993).

For a general discussion and defense of this approach, see Schwartz (1992, pp.

279-280, 1993, pp. 403-406).

 

By simply positing that certain rules are ‘unworkable’, though, these

scholars implicitly assume an unfavorable balance between (1) the sum of all

costs that would be imposed if courts tried to apply the unworkable rule, with

the large number of errors that would entail; and (2) the sum of all costs

associated with whatever rule is second-best. Other scholars have attempted a

more finely-grained analysis by explicitly modeling the costs associated with

judicial implementation of an unworkable rule. However, those costs depend

in part on the nature and the probability of various errors courts might make in

applying such a rule, and there is no consensus (and, regrettably, no empirical

data) on how best to model such an error function. For two applications of this

approach to contract issues, see Hadfield (1994), Hermalin and Katz (1991) and

Allen and Gale (1992). The general discussion of legal errors and uncertain

rules in other bodies of law (see Chapter 0790) is also relevant here.

 

11. Default Rules and Preference Formation

 

In some situations, the law’s choice of default rules could alter contracting

parties’ beliefs or preferences, thereby changing the value of the costs and

benefits associated with different rules. For example, if the law adopts an

implied warranty making sellers liable for all defects in their products (unless

explicitly disclaimed), this could conceivably lead buyers to increase the value

they place on such a warranty. At the same time, the adoption of the opposite

default rule (no implied warranty) might lead buyers to the opposite view, if it

caused them to reduce the value they place on such a warranty. In that event,

it would be possible for either default rule (an implied warranty, or the absence

of an implied warranty) to be left in place by the parties, if the law’s adoption

of each default rule changed the parties’ preferences sufficiently. It would also

be possible for both default rules to be perfectly efficient, at least when judged

by the preferences the parties would have once the law adopted either default

rule.

 

The possibility that default rules might influence parties’ preferences is only

just beginning to be explored. Experimental tests of this possibility can be

found in Schwab (1988) and Korobkin (1998); the latter also discusses many

of the potential policy implications. (Other experimental work regarding the

effect on preferences of legal rules generally is discussed in Chapter 0570).

Brief discussions of the implications for default rules in particular can also be

found in Charny (1991, pp. 1835-1840); and in Schwartz (1993, pp. 413-415),

who refers to default rules with this effect as ‘transformative default rules’.

 

12. Non-Economic Theories of Default Rules

 

While default rules have received less attention in scholarship outside of law

and economics, there are several non-economic theories that deserve mention.

For general discussions in the legal literature, see Charny (1991), Barnett

(1992), and Burton (1993).

 

The first, and least well-developed (at least as a general theory), depends on

the identification of certain rules as morally superior, as a sort of ‘merit good’.

That is, just as it is sometimes argued that all citizens ought to have certain

goods (education, health care, and so on), it is sometimes said that all citizens

ought to have certain contract rights, such as the right to complete

compensation in the event of a breach; or that the law should especially

promote certain kinds of relationships, such as those based on long-term

cooperation. Arguments of this sort could be particularly compelling if the

law’s choice of default rule influenced citizens’ own beliefs about the value of

certain relationships, as discussed above in Section 11.

 

A second non-economic theory rests on the idea of hypothetical consent.

There is an entire family of non-economic theories that traces the binding force

of contracts to individual autonomy, and to the fact that the contractual

obligation was freely chosen by the contracting party (see Section 17 below).

To be sure, these theories might seem to have little to say about the content of

default rules, which (by definition) fill in the content of obligations that were

not explicitly chosen by the parties (see Craswell 1989a). However, some have

argued that, even in the absence of explicit consent, a party should still be

bound to the rule that he or she would have consented to if he or she had

explicitly negotiated an agreement on that point. Interestingly, this argument

converges with the market-mimicking or majoritarian approach discussed

earlier in Sections 2-4. As a result, some economically-oriented scholars have

sought to rest their recommendations on this philosophic position, as well as

on more conventional economic grounds (for example, Schwartz, 1988, pp.

357-360). In the philosophical literature, however, it is disputed whether this

invocation of hypothetical consent carries any of the moral force of ‘real’

consent, or whether it adds anything to standard efficiency arguments. For

discussions in the legal literature of this issue, see Barnett (1992), Charny

(1991), Coleman, Heckathorn and Maser (1989), Craswell (1992), and the

exchanges between Coleman (1980a, 1980b) and Posner (1980, 1981). In the

philosophical literature, useful discussions include Scanlon (1982), Gauthier

(1986), and Brudney (1991).

 

A third non-economic approach suggests that default rules should be

designed to mimic the norms or customs that are already observed, either in the

community at large or in the parties’ prior relationship. This approach is often

employed in the ‘relational contract’ theory usually identified with Ian Macneil

(1978, 1980, 1981); see also Brown and Feinman (1991), Feinman (1993), and

Craswell (1993b). In addition, some scholars working from philosophical

theories of individual autonomy and consent have seen the prevailing norms

and customs as acceptable sources of default rules, at least in the absence of any

explicit agreement to the contrary (Barnett, 1992; Burton, 1993). In particular

cases, this approach could of course converge with any of the economic theories

discussed here, depending on whether the norms or customs happened to be

efficient(see the general discussion in Chapter 0800). Among the issues raised

bythis approach are questions about the manner in which the norms or customs

are to be identified (see Bernstein, 1996, pp. 1787-1795; Craswell, 1998), and

about the ability of courts or other legal decisionmakers to properly carry out

this identification (see Section 10 above).

 

D. Contracting Around Default Rules

 

13. Displacing Default Rules by Agreement

 

A default rule, by definition, leaves parties free to specify some other rule to

govern their relationship if they so choose. There is, however, very little

scholarly analysis of the steps the parties must take if they wish to specify some

other rule. Most scholars implicitly assume that specifying some other rule

would require a valid provision to that effect in a valid contract. This could

suggest that the rules governing those steps can be left to the law of contract

formation and contract interpretation, two bodies of law that are addressed at

more length in Chapters 4300 and 4400.

 

Unfortunately, those bodies of law are themselves among the least analyzed

portions of contract law. Moreover, the choices made by a legal system in

selecting the rules of contract formation and interpretation can both be

influenced by, and exert an influence upon, the choice of the original default

rule. Sections 14 and 15 briefly discuss some of the interactions between these

sets of rules.

 

14. Procedural Requirements for a Valid Agreement

 

Any attempt to displace a default rule will normally have to satisfy (at a

minimum) all the requirements of an enforceable contract. For example,

depending on the legal regime, the agreement may (or may not) have to be in

writing, and it may (or may not) have to be supported by consideration. These

requirements, and the other rules governing contract formation, are discussed

at more length in Chapter 4300.

 

Should there be extra procedural requirements for parties who wish to

contract around a default rule? If the default rule is presumptively valid, and

especially if it is presumptively valid for moral or other non-economic reasons,

it might be argued that parties who wish to choose a presumptively less valid

rule should have to take extra steps, if only to ensure (and to demonstrate to a

court) that this is what the parties really intend. For example, it might be

argued that one party should not be able to displace a default rules by means of

a single clause buried in a 30-page document that the other party will not

normally bother to read. Arguments of this sort are often made in connection

with standard form contracts and the legal doctrine of unconscionability (see

Chapter 4100). Some of the links with standard default rule analysis are noted

briefly in Craswell (1993a, pp. 12-14).

 

Indeed, arguments of this sort may fit best in connection with information-

forcing or penalty default rules. As discussed earlier (see Section 6), such rules

may be deliberately designed to induce the better-informed party to contract

around the default rule, in the hope that the process of contracting around the

rule will itself give the other party more information about the rights that he or

she now has. The efficacy of this approach, however, depends on whether the

process of contracting around the rule really does inform the other party - and

this, in turn, depends on the procedures that are required to contract around the

rule. Again: if a default rule can be altered merely by inserting a clause in a 30-

page contract that nobody ever reads, the process of contracting around the

default will not inform the other party at all.

 

On the other hand, extra procedural requirements will usually increase the

transaction costs required to contract around the default rule. For example, if

altering a default rule requires the clause in question to be pointed out and

explained to the other party, the process of contracting around the default might

indeed increase the other party’s information. However, this requirement may

also be costly to satisfy, especially if a single contract alters a large number of

default rules, and if the other party has no desire to sit through a lengthy set of

explanations. In that event, the cost of altering the default rules via this

procedure might turn out to be effectively prohibitive, so many parties would

end up leaving the original default rules still in force. If so, this would require

reevaluation of the original decision to select a default rule that was designed

not to be left in force (that is, a default rule that was chosen to be inefficient

precisely in order to induce the parties to contract around it). In this way, the

rules governing the process of contracting around a default rule can themselves

affect the principles on which the original default rule should be chosen.

 

15. Interpreting Contractual Terms that Alter a Default Rule

 

Contracting parties often use language which appears to address an issue that

would otherwise be governed by a default rule, but which is vague or

ambiguous, and thus requires interpretation. For example, imagine a contract

providing that the remedy to be paid in the event of a breach should be an

amount that would ‘reasonably compensate’ the nonbreacher. Should the courts

treat this vague language as leaving a gap in the contract, to be filled by the

normal default remedy? Or should they instead apply some other set of

principles?

 

In conventional legal terminology, default rules are said to apply only when

there is an actual gap in the contract, while questions of vague contractual

language are usually described as questions of interpretation. There is,

however, no consensus (and very little theory) on what should count as a ‘gap’

(see Ayres and Gertner, 1989, pp. 119-120). Fortunately, this distinction often

will not matter, because the approaches used to interpret contracts (see Chapter

4400) have much in common with the approaches used to select default rules.

In many cases, for example, vague or ambiguous language is interpreted so as

to fit whatever the parties probably would have agreed to if they had discussed

the matter, thus producing the same result as the majoritarian or market-

mimicking default rules discussed in Sections 2-4 (see also Goetz and Scott,

1985). In other cases, vague or ambiguous language is interpreted against the

party who drafted it, just as in the case of a penalty or information-forcing

default rule designed to induce more careful and explicit communication (see

Sections 5-9).

 

Notice, though, that some decision must still be made to determine when the

parties have taken enough steps to make their language sufficiently clear to

avoid the rule construing ambiguities against the drafter, or when their

language is sufficiently clear to avoid being interpreted in accordance with the

court’s idea of what most parties would have wanted. This is the question of

precisely how far the parties must go to contract around an otherwise applicable

default rule (or, in this case, around an otherwise applicable rule of

interpretation). As discussed in Section 14, whatever requirements the law

adopts here will have to be considered in deciding what default rule (or what

interpretive presumption) to adopt in the first place.

 

E. The Enforceability of Contracts Generally

 

16. Introduction to Theories of Enforceability

 

The analysis of default rules takes it as given that contracts are enforceable, and

concerns itself with determining the content of the enforceable obligation. This

Section addresses the opposite issue: given a contract of (let us assume) definite

content, when should that contract be legally enforceable?

 

One branch of this question asks whether contracts should be enforced by

a legal system, or whether non-legal enforcement mechanisms might be

superior (see, for example, Bernstein, 1992, 1996; Charny, 1991). Non-legal

enforcement mechanisms could include arbitration panels or trade association

boards that function much like a court, except for not being backed by official

state sanctions. They could also involve much less formal mechanisms, such as

the threat of withholding business from anyone who had broken a promise in

the past. In both of these respects, they are similar to the non-legal mechanisms

that might be used to enforce any other obligation (see Chapters 0780 and

0800), with which this literature has much in common.

 

By contrast, most of the literature on whether contracts ought to be enforced

typically abstracts from the choice of the enforcement mechanism, and focuses

instead on the question of whether (and why) contracts ought to be enforced by

any mechanism whatsoever. Non-economic theories are discussed briefly in

Section 17 below, followed by a discussion of the law and economics literature

in Sections 18-19.

 

17. Non-Economic Theories of Enforceability

 

Moral philosophers have written extensively about the question of whether (or

why) a promise should be morally binding. Some of their theories rest on

utilitarian accounts that have much in common with the economic theories;

these will be discussed in Sections 18-19. This section focuses instead on the

non-utilitarian or non-instrumental accounts. In the legal literature, general

surveys of these accounts can be found in Atiyah (1981), Barnett (1986),

Craswell (1989a, pp. 491-503), and Gordley (1991).

 

One family of theories derives the obligation to keep one’s promise from

considerations of individual freedom and moral autonomy. For example, Fried

(1981) argues that if the law did not allow individuals to bind themselves with

respect to their future conduct, it would thereby fail to respect the individuals’

status as autonomous moral agents. (For a variant account of when individual

autonomy requires that promises be enforced, see Barnett, 1986.) These

accounts do not imply that promises ought to be kept in every circumstance:

this theory, like all of the others discussed in this section, allows for the

possibility of a set of implied conditions or implied excuses. Instead, the goal

of these theories is to explain why promises are prima facie binding, and this

family of theories rests that binding force on the promise’s status as the

voluntary commitment of a autonomous moral agent.

 

Another, different set of theories rests the obligation to keep a promise on

the substance of what has been promised. Perhaps the best-known theories in

this set focus on harm to others: if one’s promise has led others to change their

behavior in reliance on the promise, so that they would now be injured if the

promisor failed to perform, that promise is binding because it is wrong to harm

other agents. Making a promise and then failing to keep it might also be seen

as a form of lying, for such a promisor has misled others about the future. Other

theories in this set focus on reciprocity or restitution: if one has received a

benefit and promised to pay for it, that promise is binding because it is only

right to pay for the benefits one has received (Atiyah, 1981, pp. 34-36). Under

some theories, the fairness of the terms of the promise is also relevant to

whether the promise is binding (for example, Gordley, 1995).

 

Under any of these substance-based theories, the promise’s status as the

voluntary commitment of a free moral agent is less significant, for the agent is

(in some sense) promising to do what he or she ought to be doing anyway.

Indeed, under many of these theories, if there is no independent reason for the

agent to perform the action - for example, if the agent has received no benefits,

and if no one has yet relied on the promise - the obligation to keep the promise

is seen as weaker or non-existent. These theories thus have difficulty explaining

why the obligation should be stronger in the case of an individual who has

made a promise than it is in the case of an individual who has acted identically

but has explicitly disclaimed any promise (for example, ‘I think I’m going to

do x, but I warn you that I’m not promising to do it, so you should rely only at

your own risk’, or ‘you can confer those benefits on me if you want, but I warn

you now that I have no intention of paying you anything for them’). Atiyah

(1981, pp. 184-202) has argued that an explicit promise could serve as

evidence, perhaps even conclusive evidence, that the underlying obligation

really is a just one that ought to be enforced. If one asks why an individual’s

promise ought to be given such evidentiary weight, however, it is difficult to

avoid falling back either on autonomy-based explanations of the sort discussed

earlier in this section, or on utilitarian theories of the sort to be discussed in

Sections 18 and 19.

 

18. Economic Theories of Free Exchange

 

Economic theories of why promises should be enforced can be divided into two

categories. One set of theories, to be discussed in this section, focuses on the

utility created by the eventual performance of the promise. The other set, to be

discussed in Section 19, focuses on the utility created by the ex ante incentives

that the promise sets up.

 

The first economic argument for enforcing promises rests on the utility that

will be produced when the promise is eventually performed. Since voluntary

transactions generally increase the welfare of all parties to the transaction,

whenever a promise is voluntary it could be argued that welfare will usually be

increased if the promise is carried out. Viewed in these terms, the economic

argument for enforcing promises is very similar to the economic argument for

free exchange and free markets generally (see Chapter 5000).

 

This argument, however, could imply that a promise should not be binding

If conditions have changed sufficiently that the promised transaction would not

increase both parties’ welfare. For example, if a promisor’s costs have

increased to the point where it is no longer efficient for him or her to perform

the promise, this theory could suggest that the promisor ought to be released

with no obligation to pay any damages at all, because this particular efficiency

rationale for enforcing promises no longer applies. Under this theory, the only

way to save the prima facie obligation to keep one’s promises (even after

conditions have changed) is to argue for the virtues of a general rule over a

case-by-case inquiry into the efficiency of any given transaction - in

philosophical terms, by shifting from act-utilitarianism to rule-utilitarianism.

That argument, in turn, must rest on empirical claims about the ability of courts

to determine whether and when performance of the promise was still efficient.

 

More generally, there is an important difference between permitting free

exchange and permitting (or enforcing) binding promises. An exchange can

take place instantaneously, but a promise necessarily involves a commitment

to act in a certain way at some time in the future. Once this temporal element

is recognized, it can be seen that enforcing promises does not simply transfer

existing goods from one owner to another. Instead, the enforcement of promises

creates a new good: it allows people to exchange ‘wheat to arrive on September

1' (for example), where without a binding promise they could only exchange

actual bushels of wheat. Viewed in these terms, the economic case for

enforcement rests on the proposition that this new good (that is, the good

represented by a future commitment) is a socially useful good which people

frequently will want to exchange. To explain why such a commitment is useful

and valuable, economists have focused more on the ex ante effects created by

such a commitment, as discussed in Section 19 below.

 

19. Economic Theories of Advance Commitments

 

Most economic justifications for enforcing promises have focused on the ex

ante effects that would be created by a general rule of enforceability. In essence,

these economic theories analyze promises as effectuating a present transfer not

of goods and services, but of rights and duties. (For a similar view expressed

in non-economic terms, see Barnett, 1986, pp. 291-300.) Such a transfer of

rights and duties may itself produce efficiency gains, independently of whether

it is efficient to actually carry out the promise.

 

The efficiency gain that is analyzed most often stems from the effect on the

promisee’s incentive to rely on the promised behavior (see Goetz and Scott,

1980). If the law denied promisees any compensation whenever a promisor

could show that performance of the promise had become inefficient, this would

shift more of the risk of a change in conditions to the promisee, and thus would

reduce the promisee’s incentive to rely. To be sure, if the law instead

guarantees that promisees will be compensated whenever the promisor fails to

perform, this could create incentives for excessive reliance on the part of the

promisee (see the discussion of reliance incentives in connection with remedies

for breach in Chapter 4600). If the incentives for excessive reliance can be

constrained by other legal doctrines, however, the net effect on the promisee’s

reliance incentives could still be positive. The argument that enforceability is

needed to induce one party to take the risky step of beginning his or her own

performance (when the other party’s return performance is not due until later)

is really a special case of this argument, since beginning performance is one of

the many ways in which parties may rely on a contract.

 

More generally, there are many other ex ante effects that could be produced

by a rule requiring compensation even when conditions have changed to make

performance unprofitable. If the promisor and promisee differ in their attitudes

toward risk, a rule requiring compensation may achieve a better allocation of

risk between the two parties (see, for example, Polinsky, 1983). A rule

requiring compensation may also increase the promisor’s incentive to tell the

truth about the conditions that will affect his or her performance, thus

increasing the promisee’s information about those conditions (see Shavell,

1991; Craswell, 1989b; Katz, 1996, pp. 1289-1291). A compensation

requirement may also give the promisor an incentive to affect those conditions

directly, if the probability of performance rests on factors that are within the

promisor’s control. Generally speaking, all of the economic analysis of efficient

remedies for breach (see Chapter 4600) is relevant here, since to make a

promise enforceable is to set a non-zero remedy for the promise’s breach. The

less-developed economic analysis of the conditions under which formation of

a binding contract should be inferred (see Chapter 4300) is also relevant here.

 

Acknowledgments

 

Richard Craswell is a professor of law at the Stanford Law School. Jack L.

Goldsmith, Eric A. Posner, Cass R. Sunstein, and two anonymous referees

provided helpful comments. Financial support was provided by the Lynde and

Harry Bradley Foundation and the Sarah Scaife Foundation at the University

of Chicago Law School.



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