Positivism and the Separation of Law and Economics

The modem field of law and economics – that is, the application of economic analysis to legal subjects other than trade and business regulation – is now over thirty years old, but it remains controversial in the legal academy and, to a lesser extent, in the profession at large. Since its beginnings in the early 1960s, the economic approach has provoked substantial opposition and antagonism. The sources of this resistance, however, are a matter of dispute. Many economists and economically influenced lawyers attribute it to more traditional lawyers\u27 reluctance to learn a new and unfamiliar set of concepts and techniques. Critics of the economic approach offer a variety of other explanations. Some are skeptical of the utility of abstract theoretical modeling in the social sciences, others object to economics\u27 central behavioral assumption of rational choice, still others criticize economics\u27 supposed libertarian politics and ideological allegiance to laissez-faire. The explanation that has attracted the most attention by far is economics\u27 commitment to the efficiency criterion: proponents of the economic approach tend to argue that more traditional lawyers have not paid enough attention to efficiency, and its detractors tend to argue that economics inappropriately focuses on efficiency to the exclusion of other normative considerations. All these explanations, however, are too narrow. As with any conflict between rival disciplines, the underlying division between law and economics is methodological and cultural. The two fields use different rhetorics, different styles of discourse, different epistemologies, and different literary forms in developing and articulating their respective accounts of the world. Resistance to interdisciplinary exchange between lawyers and economists comes partly from the fact that neither group wishes to give up its own culture in favor of the other\u27s.5 It also comes, however, from the two sides\u27 failure to understand each other\u27s cultural practices in full context

The Option Element in Contracting

Most contractual arrangements are either structured as options or include options as important elements. As a result, many of the major doctrines of contract law effectively operate to create or to set the terms of such options. For instance, it has long been recognized that a contract that is enforceable only through monetary liability operates in practice as an option, because as a legal matter the promisor retains the power either to perform or to breach and pay damages. Similarly, the doctrine of promissory estoppel, which attaches liability to precontractual statements in cases where they are reasonably relied upon, effectively grants an option to the relying party to enforce the promise or not as she finds convenient. Similar options arise where contracts are voidable – but not void – for reasons of mistake, lack of capacity, or fraud

Virtue Ethics and Efficient Breach

The concept of efficient breach – the idea that a contracting party should be encouraged to breach a contract and pay damages if doing so would be more efficient than performance – is probably the most influential concept in the economic analysis of contract law. It is certainly the most controversial. Efficient breach theory has been criticized from both within and without the economic approach, but its most prominent criticism is that it violates deontological ethics – that the beneficiary of a promise has a right to performance, so that breaching the promise wrongs the promisee. This essay argues that this criticism is misplaced, and that efficient breach theory, properly understood, is not inconsistent with parties\u27 complying with their deontological obligations. Instead, the intuitive resistance that most people experience to the concept may be better explained by aretaic concerns – specifically, that failing to complete a contractual relationship is not conducive to virtuous character or to the maintenance of a flourishing community. While efficient breach can be squared with deontological ethics, it cannot be squared with virtue ethics unless one is prepared to argue that seeking efficiency is a virtue, or at least that it is not a vice

When Should an Offer Stick? The Economics of Promissory Estoppel in Preliminary Negotiations

The purpose of this Article is to examine the doctrine of promissory estoppel, as it applies in the context of preliminary negotiations, from the viewpoint of the economic theory of rational choice. This is part of a larger project that attempts to understand better the regulatory role of contract formation law generally. From a regulatory vantage point, estoppel and related legal doctrines operate as economic regulations; they shape the bargaining process by influencing the negotiators\u27 incentives to make and to rely on preliminary communications. As with all economic regulations, however, some rules do better than others at promoting efficient exchange, and lawmakers interested in maximizing social wealth must take this into account. Because the regulatory perspective differs in important respects from more traditional approaches to the subject, some general remarks are necessary to set the stage. As I have argued elsewhere, the traditional literature on offer and acceptance has taken the primary functional justification for legal doctrine in the area to be coordination. In this traditional view, contract formation rules are primarily social conventions that serve to help contracting parties coordinate their agreements, by ensuring that the parties attach the same meaning to their objective manifestations and that their meaning will be understood by third parties called upon to enforce the agreement. This is what Lon Fuller called the channeling function of legal formalities. Courts and commentators who view contract formation law primarily as a coordination device will spend most of their time on what I have elsewhere called convention maintenance. By this I mean activities such as describing and promulgating the prevailing conventions; protecting the reliance investments of those who operate according to them; providing newcomers with incentives to learn them; and assisting everyone in applying them in ambiguous and novel situations – all for the sake of averting misunderstandings. The enterprise is primarily an interpretive one: Lawyers are directed to search for the parties\u27 reasonable or customary expectations, given the factual circumstances of the case at hand, in order to determine what inferences the parties are justified in making about each other\u27s intentions. As an illustration, consider the common law doctrine that, absent special circumstances, an offeree\u27s silence in the face of an offer will not constitute assent. The usual explanation for this rule is based on conventional understanding: Ordinarily, silence does not warrant an inference of consent, since there are too many other reasons to remain silent. Within this perspective, which I will call the coordination or interpretive approach, legal analysis proceeds from the bottom up. Because the proper conventions are taken as established and as embodied in the parties\u27 ordinary expectations, lawmaking authority is decentralized; it flows from the parties and the community from which they come to lawyers and judicial officials. Such an arrangement makes sense if parties\u27 expectations are largely independent of legal practices – for instance, if expectations are based on social custom and are enforced by nonlegal sanctions such as reputation that the parties regard as more important than what the courts can do to them. If so, law must defer to the larger society if private individuals are not constantly to be disappointed in their endeavors. Such an approach will be familiar to students of Article 2 of the Uniform Commercial Code (UCC), which defers throughout to commercial practice and usage

The Law and Economics of Contracts

This paper, which will appear as a chapter in the forthcoming Handbook of Law and Economics (A.M. Polinsky & S. Shavell, eds.), surveys major issues arising in the economic analysis of contract law. It begins with an introductory discussion of scope and methodology, and then addresses four topic areas that correspond to the major doctrinal divisions of the law of contracts. These areas include freedom of contract (i.e., the scope of private power to create binding obligations), formation of contracts (both the procedural mechanics of exchange, and rules that govern pre-contractual behavior), contract interpretation (what consequences follow when agreements are ambiguous or incomplete), and enforcement of contractual obligations. For each of these sections, we address the economic analysis of particular legal rules and institutions, and, where relevant, connections between legal arrangements and associated topics in microeconomic theory, including welfare economics and the theory of contracts