| |
| META TOPICPARENT | name="Main.RohanGrey" |
|---|
The following is an edited transcript of a Facebook conversation between Joseph Itkis (JI), Jonathan Brice (JB), Shaked Sivan (SS) and myself, Rohan Grey (RG) that was inspired by our class yesterday and we thought might be worth sharing. Apologies in advance for any edit-fails. |
| | -- RohanGrey - 25 Jan 2012 |
|
>
> | My take: |
| | |
|
>
> | 1. What should the function of contract law be? |
| | |
|
<
< | Here is a “refactored” version of the above dialogue, written in a summative prose style with the explicit attributions to individuals removed for the sake of conceptual clarity. Given I was a participant in the conversation, there is a possibility of bias in my interpretation, although I have attempted in good faith not to present misleading or caricatured representations of the positions held by other participants. Luckily, since we included the original 5000-word transcript above in addition to this summary (at the hopefully forgivable additional cost to the website server of maybe 100kB of data), interested readers still have the ability to make their own decision as to whether I’m fairly representational in my interpretation of the positions by others. |
>
> | Contract law should empower judges to adjudicate disputes emerging out of certain forms of commitments between private actors. Remedies available to judges for contractual breaches include a court order for specific performance, as well as an order awarding damages to the party suffering the breach. |
| | |
|
<
< | I’m at about 1080 words. will edit down to 900. |
>
> | 2. How should courts determine which outcome to prescribe? |
| | |
|
<
< | The discussion above centered around three normative questions: |
>
> | The law should not place any intrinsic value in one remedy over another, but rather should compare the specific and general effects of each and adopt the one deemed most socially optimal given the totality of the circumstances. |
| | |
|
<
< | 1. What is the social purpose of establishing a system of legally recognized commitments (i.e. contract law)?
2. To what degree, if at all, should economic (i.e. utilitarian/consequentialist) outcomes be considered when determining the appropriate judicial response to an intentional breach of contract?
3. How, if at all, should the act of intentional breach itself be valued in the economic calculus when determining the relative costs and benefits of performance against non-performance of a contract? |
>
> | The optimal remedy may be defined as the action that results in the largest increase in economic value for society from the same starting conditions. However, attempts by courts to accurately measure economic value are problematic, since existing pricing mechanisms assign value imperfectly and reflect path-dependent effects of previous such attempts to quantify social value. Consequently, an economic calculus solely based on assessment of real and expected monetary damages will tend to reinforce rather than rectify existing market imperfections and pricing failures. |
| | |
|
<
< | In regards to the first, there was general agreement that contract law functioned to allow private actors the option to voluntarily bring the public to bear witness on their private commitments to each other, and to arbitrate disputes regarding those commitments as they arose. This arbitration capacity included the discretionary power to enforce commitments if the courts deemed such a solution to be socially optimal. |
>
> | The difficulty of conducting genuine predictive economic analysis can be seen in discussions of so-called “efficient-breach” theory, which advocates intentional breach of contract in situations where the breaching party expects to profit more from breaching and paying compensatory damages than it would from honoring the contract. This approach assumes the economic cost of a breach is identical to the liabilities that can be legally imposed on the breaching party. Hence, this theory only holds if the purported method for identifying, measuring and allocating all costs of breach to the breaching party is as perfect as advertised. |
| | |
|
<
< | The first major point of disagreement was whether the aim of legal arbitration should be to promote the actual performance of commitments, where feasible, or merely to determine an appropriate form of compensation to a party that suffers a loss due to another party’s non-performance, irrespective of whether that performance was intentional or unintentional. This disagreement ultimately turned around whether or not courts should accord any implicit value to the integrity of a contract. |
>
> | 3. How, if at all, should the law value the act of intentional breach in calculating the costs and benefits of ordering specific performance versus awarding damages for non-performance? |
| | |
|
<
< | This question was determined to be a normative one, since Holmes’s “bad man” approach was useful in ascertaining the positive qualities of a particular court or jurist’s judicial approach rather than the its relative merit. There was general agreement that most self-styled “efficient breach” theorists such as Galabresi and Posner advocated the latter approach, while Eben appeared in class to be suggesting that the former interpretation may be preferable. |
>
> | If the courts wholly adopted an efficient breach theory that assigned nominal or zero value to specific performance of contractual obligations, then the economy would ideally adjust to eventually place little or no reliance on actual performance in instances where the risk of efficient breach is high. Instead, individuals and firms would attempt to minimize the cost of resulting uncertainty by taking out insurance, developing more comprehensive contingency clauses, and/or assigning a lower value to the contract in the first place. While impossible to predict, it is possible that the costs imposed by such ameliorative measures, as well as the more general uncertainty regarding contractual performance, would end up being higher than the benefits gained from promoting intentional breach when it is deemed profitable to one party. |
| | |
|
<
< | In order to answer this question, the discussion then turned to the question of what the appropriate framework for analysis was – in particular, whether or not the law should adopt a purely economic (i.e. utilitarian/consequentialist) perspective in determining the optimal form of legal remedy. There was disagreement between those who saw Eben as advocating that courts acknowledge and consider the external deontological value implicit in social trust, and those who saw him as adopting a consequentialist approach but making a more nuanced economic argument regarding the negative externalities associated with efficient breach theory. Ultimately the question was left unanswered, although the discussion of the original question proceeded upon the assumption of the latter approach. |
>
> | On the other hand, courts could choose to assign a non-trivial value to specific performance over non-performance with compensation. There are three ways this could be done. Firstly, courts may attempt to calculate the expected marginal cost of greater contractual uncertainty represented by each individual act of intentional breach. Alternatively, courts may decide that such calculation is impossible, and deem the optimal solution to be an approximate or even arbitrarily determined Pigovian tax, in order to disincentivize all intentional breaches. Thirdly, courts may decide to presumptively favor specific performance and forced injunctions, and only carve out specific or general case exceptions when performance is unfeasible or unreasonable. Regardless of which particular approach was adopted, each one would result in a higher degree of certainty in contractual performance than in the same context under an efficient breach theory. However, the benefits gained from greater certainty in judicial enforcement of contractual obligations may be offset by excessive restrictions on the ability of contracting parties to opt-out when such an option has vastly greater benefits to all parties involved (including society), but unacceptable costs to the party that would directly suffer the breach. |
| | |
|
<
< | It was also suggested by some that the claimed distinction between the two perspectives was illusory, given that the rule of law (including its protection of so-called natural “rights”) derives social legitimacy on the grounds that it purports to promote aggregate social utility, which is indistinguishable from a “perfect” economic outcome. They went on to argue that it was an implicitly moral decision whether to adopt a system that attempts to protect parties from intentional breach by other contractually bound parties, or one that encourages breach when a contractually bound party deems it to maximize personal utility over the cost of paying compensatory damages to the party that directly suffers from the breach. Others disagreed and argued that Eben was attaching additional moral considerations to social trust beyond its instrumental value in promoting social utility. They argued that contract law was qualitatively different to criminal law, which incorporated moral rights claims as well as economic claims, although they acknowledged that even in criminal law economic analysis is often employed, and that the creation of a legal contract could potentially be viewed as the creation of a legal “right” of one party to force performance by the other. |
>
> | Ultimately, the decision of which of these approaches to adopt depends on a value judgment. Perhaps there is an intrinsic tradeoff between the benefits of market efficiency and higher certainty in contractual enforcement. Perhaps the apparent tradeoff is in fact illusory and merely represents a failure by efficient breach theorists to fully internalize the external costs associated with encouraging breaches deemed profitable by the breaching party. Regardless, the process of determining the broader effect of a system of permissible intentional breaches is important, and shouldn’t be assumed away at the outset of economic analysis of contractual disputes. |
| | |
|
<
< | The third issue we discussed was how courts should conduct utility-maximization analysis – specifically, whether or not they should consider intentional breach a negative externality that warranted a Pigovian sanction in the interests of promoting aggregate utility. At the outset there was significant disagreement whether or not there was in fact a non-trivial benefit gained to businesses from greater trust in the likelihood of legal enforcement of contractual promises. It was generally agreed that social custom affected a firm’s decision whether or not to conduct an efficient breach, and consequently that an efficient breach theory of contract law did not necessarily lead to the complete disregarding of contractual obligation whenever it became profitable to do so. However, this acknowledgment did nothing to address the question of whether a level of trust beyond that maintained through social custom was valuable and warranted legal protect through internalization in efficient breach analysis.
Moreover, it was suggested that private actors already internalized the cost of loss of reputation and social trust into their efficient breach analysis, and hence the externality was already accounted for. However, this claim suffered a fallacy of composition, in that it ignored the potential difference between the sum of individual costs of breach to each actor in each dispute, and the aggregate cost of loss of trust on the efficiency of contract law itself.
Alternatively, it was suggested that the example of the diamond industry indicated that external sanctions were unnecessary since industry would effectively self-regulate, however it was pointed out in response that the practice of putting individuals to death for violating handshakes was in fact an imposed penalty determined collectively by all relevant actors and applied uniformly to all handshakes in the industry, rather than through a case-by-case determination, and hence was indistinguishable from a general socially imposed legal sanction on intentional breach of contract.
There was general agreement that social institutions, including legal systems, have the capacity to shape broader social values, however some expressed skepticism that contractual enforcement would be particularly effective in generating genuine trust between individuals. Even if this was true, however, there was general agreement that there would still be tangible effects on the level of contractual enforcement, and an acknowledgment that these effects could themselves in turn inspire greater levels of social trust.
Furthermore, it was suggested that a punitive model would potentially reduce the number of contracts entered into, although it was also acknowledged that greater trust in contractual enforcement could increase the strength of contracts as well as provisions to account for a greater range of contingent outcomes, through exceptions, liquidated damages provisions and the like.
Finally, it was acknowledged that a quantifiable calculation of aggregate social cost would be extremely difficult. However, it was also pointed out that courts currently enjoy a wide latitude in determining incidental and expectational loss, suggesting that an analogous process of quantification is already undertaken by the courts.
-- RohanGrey - 25 Jan 2012 |
>
> | -- RohanGrey - 1 Feb 2012 |