The Economics of Contracts: Theories and Applications

By Eric Brousseau; Jean-Michel Glachant | Go to book overview

NOTES

Chapter 7 was originally published as “Contract Theory and Theories of Contract Regulation, ” in Revue d'Economie Industrielle (92, 2000).

1
Early treatments of the topic are in Schwartz (1992a) and Tirole (1992). Citations to more recent work will appear below.
2
Courts will not enforce contracts that create externalities, such as agreements to fix prices. There also is considerable regulation of contracts between firms and consumers, commonly rested on the ground of an imbalance in sophistication and resources between these parties. Contracts that create externalities and consumer contracts are beyond the scope of this chapter.
3
A competing theory of contract regulation that is pursued largely by legal scholars holds that the state should enact contract rules that are fair and that promote community among contracting parties. An extensive treatment of this theory is in Collins (1999). Implementing a fairness theory is difficult when parties have the freedom to alter fair legal rules that do not maximize their expected gains. This point is developed in a little more depth on p. 120 below.
4
Private associations often create rules to regulate transactions among the members and between members and outside parties. These rules have the legal status of contracts made among an association's membership. The question
whether courts should treat these contracts as they do ordinary market contracts is unsettled in the law and among commentators, but there is a tendency for courts to enforce the contracts as written when the rules are clear. An interesting study of the contrast between the adjudicatory practices of courts and the adjudicatory practices of the institutions that private associations create is Bernstein (1996).
5
There are fewer such generally accepted, privately created meanings than had been supposed. See Bernstein (1999).
6
A complete taxonomy of default rule types is found in Schwartz (1994).
7
As an illustration, the American Uniform Commercial Code creates a set of default rules to regulate sales transactions. These rules use terms that are derived from commercial practice, but the Code defines them explicitly. Hence, parties who today use a statutorily defined term are held to intend the statutory meaning. The original Code's list of terms is not exhaustive, however, so courts are continually defining new terms, some of which have been incorporated into Code revisions. This process continues.
8
In addition to this theoretical difficulty, parties seldom would want a court to implement an expost efficient solution in the rare cases when it could because commercial agents need prompt answers. Litigations take a long time, so that any otherwise efficient solution usually would be outmoded before it could be devised. Perhaps for the reasons given in the text and in this note, courts seldom attempt to implement expost efficient outcomes. There are examples of these attempts in connection with long-term contracts.
9
For a review, see Schwartz (1998).
10
For a discussion, see Posner (1998).
11
This is suggested in Bernstein (1996).
12
Courts recognize these difficulties implicitly, and tend in asymmetric information environments to enforce only those terms that condition on verifiable information; they do not try to create new rules. (See Schwartz1992b.)

-125-

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