Self-correcting contracts?

Note: This is the fourth of six blog posts in which we review Nate Oman’s new book The Dignity of Commerce: Markets and the Moral Foundation of Contract Law.

After tackling the legal doctrine of consideration in Chapter 5 (see our 3/19 blog post), Professor Oman turns his gaze to the structure of contract remedies in Chapter 6. He pays particular attention to two fundamental features of contract remedies–private standing and bilateralism–and argues that autonomy-based theories and efficiency theories of contract law are unable to explain or justify these twin features of contract remedies. (FYI: Although we agree with Prof. Oman that these traditional theories of promising are totally lacking, we would point out that his market theory of contract law also does not fully explain the remedial features of private standing and bilateralism.)

Briefly, private standing refers to the fact that breach of contract is not a crime or even a regulatory offense. Instead, it is the disappointed promisee who must take it upon himself to sue the breaching promisor, or in the words of Professor Oman: “Contract law does not enforce contracts per se; rather, it empowers disappointed promisees to act against breaching promisors through the courts” (p. 132). Bilateralism, by contrast, refers to the fact that the breaching defendant must pay damages directly to the plaintiff. Moreover, Professor Oman points out that such monetary damages are limited to “expectation damages” (i.e. the economic value of what was promised) or “liquated damages” if these are clearly spelled out in the contract itself, but in most cases the actual compensation a disappointed plaintiff can expect to recover for breach will be paltry at best or even non-existent (as Shylock would discover in Shakespeare’s Merchant of Venice). As Professor Oman astutely notes (pp. 129-130), contract remedies are generally weak because penalties are not enforceable, because the law imposes a duty on plaintiffs to mitigate his losses at his own expense, because consequential damages (or lost profits) are rarely awarded to contract plaintiffs, and because each side must pay his own legal fees in civil litigation in the U.S. (the American rule).

For our part, we have always been puzzled why contract remedies are so damn stingy or why breach of contract is not a crime. After all, most District Attorney Offices have special units for prosecuting economic crimes, like passing off bad checks. So, why doesn’t the law empower D.A.s to prosecute bad contracts, especially if “well-functioning markets” (to borrow Oman’s favorite phrase) are so sacrosanct? One possible answer to this puzzle is that many contracts and contractual relationships–like many markets–might be self-correcting. That is, so long as both contracting parties are concerned about their reputation, i.e. so long as they have more to gain by keeping their promises instead of breaking them, then we might expect them to reach a mutual accommodation and work out their contractual differences informally in order to avoid the cost and uncertainty of litigation …

Image result for self-correcting markets


About F. E. Guerra-Pujol

When I’m not blogging, I am a business law professor at the University of Central Florida.
This entry was posted in Economics, Ethics, Law, Literature, Philosophy. Bookmark the permalink.

1 Response to Self-correcting contracts?

  1. Pingback: Exit, voice, and boilerplate | prior probability

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