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Abstract:
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.

contract law, freedom of contract, contract formation, pre-contractual liability, promissory estoppel, interpretation, incomplete contracts, default rules, form and substance, breach of contract, contract damages, private enforcement of contracts, contract theory

Abstract:
Contract law attempts in various ways to regulate the information that contracting parties exchange. However, most contract law doctrines (and most contract law scholars) have yet to come to grips with the practical issues involved in regulating information. For instance, the disclosure of information can produce costs as well as benefits, by distracting parties from other, more important information; so it is often hard to decide which information should have been disclosed in any given case. Similar costs and benefits are often involved even in cases involving false statements (misrepresentations), where liability might seem less controversial.

While these issues are underappreciated in contract law, they are much more familiar in federal consumer protection law, especially in cases involving false advertising; and they are beginning to be recognized in products liability cases involving the duty to warn. This paper suggests various ways to improve contract law's handling of misrepresentation and nondisclosure, all of which involve closer attention to the relevant costs and benefits.

contracts, misrepresentation, disclosure, information, consumer protection, products liability

Abstract:
This paper describes the modern economic analysis of contract law, emphasizing its (often unappreciated) similarities with various non-economic perspectives. The economic analysis began with theories that equated the efficiency of enforcing promises with the efficiency of carrying out the promised actions, a view that was starkly at odds with many non-economic perspectives. By contrast, though, modern economic analyses recognize that legal enforceability triggers a much more complex set of effects. For example, enforceability may influence not only whether the promise is carried out, but also whether the promise gets made at all, or how carefully the promisor thinks about the promise before making it, or how much the promisor spends on precautions to guard against accidents that might leave her unable to perform in the future (to list just a few of the possibilities).

This paper first describes the more modern economic approach, and distinguishes it from the older view that the efficiency of enforcement depends only on the efficiency of the promised actions. It then discusses the implications of that distinction for several issues of philosophical interest. For example, questions of paternalism - should courts try to decide whether enforcement of a promise would be efficient, or should they leave that to the parties to decide? - become more difficult once it is recognized how many effects must be considered in any assessment of efficiency. The argument that promises should be enforced only if and when they have been relied upon, and the related argument that damage remedies should be limited to reliance damages, also become more doubtful once the effect on reliance is seen as only one of the possible effects of legal enforceability. The paper also discusses the similarities between modern economic analysis and the views of (a) "relational contract" theorists, who emphasize that many contracts govern an ongoing, multi-faceted relationship; (b) "private regulation" theorists, who analogize contracts to regulatory schemes that are enacted by private parties; and (c) "property theorists," who see contracts as instantaneously transferring an entire bundle of property rights and duties.

Abstract:
Autonomy-based theories of contract law hold (roughly) that people should be free, over some range, to choose the commitments that they make; and that promises are binding on a party precisely because they represent that party's voluntary choice. In 1989, I argued that these theories had no implications for contract law's choice of default rules, including its remedies for breach. Recently, however, various scholars have challenged this thesis by arguing that autonomy-based theories do require (or rule out) some default remedies.

This paper responds to several of those arguments - in particular, to those offered by Dori Kimel, Jody Kraus (reconstructing an argument of Charles Fried's) and Daniel Markovits, among others. In brief, Kimel's argument asserts that expectation damages best protects the entitlement that was transferred by an enforceable contract - but if the parties' contract is silent as to remedies, the actual application of this principle requires a default rule to interpret the contract itself, to decide what entitlement has actually been transferred. As a result, Kimel's argument justifies expectation damages only in a purely formal sense: a sense that allows any amount of damages to be called expectation damages, depending on how we interpret the underlying contract. The arguments of Kraus and Markovits, by contrast, assert that some obligations backed by remedies other than expectation damages should be classified as obligations in tort rather than in contract. But these, too, are merely claims about the labeling or classification of obligations, which do not speak to the question of which obligation should be adopted as the law's default rule in cases where the parties are silent.

contracts, remedies, autonomy, expectation

Abstract:
The 1936 article by Lon Fuller and William Perdue, "The Reliance Interest in Contract Damages," deserves its place as a classic in the history of contract theory. As a piece of substantive contracts scholarship, though, that article is several decades out of date, and (I argue here) is not even very useful as an organizing principle in teaching contract remedies. The first part of my article surveys various normative theories that have been advanced by modern scholars, to show how little any of them employ or depend on Fuller and Perdue's three-way classification between the expectation, restitution, and reliance "interests." The second part surveys the remedies case law, showing that Fuller and Perdue's classification is not even very helpful as a descriptive organizing principle: it obscures important similarities between remedies that nominally protect different "interests," and important differences among remedies that nominally protect the same "interest." I conclude that Fuller and Perdue's three-way classification -- important as it undoubtedly was in the historical development of contract theory -- is no longer a useful analytic tool, and offer some suggestions as to what might replace their classification.

Abstract:
The existing literature on willful breach has not been able to define what should count as "willful." I argue here that any definition we adopt has implications for just how high damages should be raised in those cases where a breach qualifies as willful. As a result, both of these issues -- the definition of "willful," and the measure of damages for willful breach -- need to be considered simultaneously. Specifically, if a definition of "willful" excludes all breachers who behaved efficiently, then in theory we can raise the penalty on the remaining inefficient breachers to any arbitrarily high level ("throw the book at them"). But if, instead, a given definition of willful would catch even some efficient breachers in its net, the damages assessed against willful breachers should be more limited. In that case, damages for willful breach might still justifiably be raised, but they should be raised only to the level that is economically efficient.

contract, breach, remedies, damages, penalties, negligence, strict liability

Abstract:
Customs can be thought of as a kind of pattern or regularity in prior behavior, much as common-law doctrines can be thought of as a pattern or regularity in court decisions. In jurisprudence, however, it would be controversial to claim that patterns in court decisions have an existence of their own, or that those patterns can be identified independently of the goals and beliefs of the person doing the identifying. This paper argues that the existence (and identification) of customs should be subject to exactly the same controversy. In particular, it suggests that the goals, beliefs and other normative premises of the person doing the identifying must inevitably play a role in the interpretation and application of customs. It also reviews the cases interpreting and applying customs to issues of contract and commercial law, suggesting that courts have been doing exactly that.

Abstract:
When enforcement is imperfect, so the probability that any given violation will be punished is less than 100%, it is often said that the ideal penalty (insofar as deterrence is concerned) equals the harm caused by the violation multiplied by one over the probability of punishment. In most contexts where enforcement is imperfect, however, the probability of punishment will decline with any improvement in a defendant's behavior. If so, the deterrent effect will differ depending on whether the multiplier is calculated (1) case by case, to reflect each defendant's actual probability of punishment, or (2) on an average basis, to reflect the average probability of punishment facing all defendants. The deterrent effect will also be different if the law uses (3) a constant fine, based on the average probability of punishment and the average harm.

This paper analyzes the deterrent effects of all three regimes (focusing on the latter two, which are much more common in real legal systems). Under the latter two regimes, optimal deterrence generally is not achieved by following the conventional wisdom, and setting the expected punishment equal to the expected harm divided by the probability of punishment. Under the second regime, optimal penalties will be (weakly) lower than this benchmark; under the third regime, optimal penalties could be either higher or lower. The paper also discusses the administrative differences between the regimes, such as the informational demands they place on the legal system, or the effect of each regime on risk-aversion and on litigation costs.