Péter
Cserne
Freedom of contract is an ideologically charged notion
which may attract strongly-held political beliefs[1]
but which eludes the interest of the lawyer in his everyday work for the most
part. To revoke the situation in this respect in Hungary, while the
Constitutional Court has elaborated a doctrinal theory on the legitimate reasons
for legislative limitations of freedom of contract,[2]
standard text-books on contract law usually review (not even exhaustively) the
different forms and types of the limits figuring in private or
administrative law without even mentioning theoretical problems.[3]
So the
Constitutional Court used abstract theoretical arguments, but these were
deduced from more general theorems of a certain constitutional dogmatics and
couldn’t reflect, by their nature, to questions raised in the theoretical
literature on contract law. What is more curious is that also scholarly work in
contract law has been, even since the political and economic changes in 1989
and 1990, until recent times and with very few exceptions,[4]
almost insensitive to developments in contract theory, at least as it has
formed in the English-speaking countries. Both approaches seem to be more or
less closely tied to legal texts, the Constitution and the Civil Code,
respectively.
If I am
right in sketching the Hungarian situation of contract theory in this way, it
will not be too late or unjustified to resume some of the main issues in
contract theory in the mirror of a book, published in 1993. It is the treatise
of a Canadian law professor, Michael J. Trebilcock on The limits of freedom
of contract.[5]
This
paper does not intend to be exhaustive as a review, it focuses rather on
problems which seem to be of interest for a reader trained in law. Its
structure is the following. After resuming the general character of the
argumentation, I discuss some reasons for limiting freedom of contract,
according to the order of the chapters in the book: commodification,
externalities, coercion, asymmetric information imperfections, symmetric
information imperfections. Then I make a detour to sketch a very simple version
of the standard economic analysis of the breach of contract. The concluding
section summarises some lessons for the Hungarian private law scholarship.
Throughout the paper I shall avoid to cite technical details and microeconomic
jargon usual in economic-analysis-of-law texts[6],
except when it seems necessary to do otherwise.
Behind the law of contracts, a central subject area of
private law lies a broad set of economic, social and political values that
define the role of markets in modern developed countries. But markets are not
the sole mode of social organisation. As Heilbroner argues,[7]
societies may organise production and distribution around one of these:
tradition (social conventions and status), command (centralised information
gathering and processing and coercion) and market (decentralised decisions). At
the same time a modern developed society not only has to cope with certain
backdrops of the market economy relative to the two other modes of social
organisation (potential for dramatic shifts in consumption and production,
destabilisation of personal, social and communal relationships, and a
significant degree of inequality) but a real society combines all these three
organisational modes. Despite a relatively wide consensus in favour of economic
liberalism and the market economy, there remain "many troubling and
potentially divisive normative issues".
Trebilcock
calls this consensus, together with its theoretical underpinnings the
private ordering paradigm. In neo-classical economics this
"predilection for private ordering over collective decision-making is
based on a simple (perhaps simple-minded) premise: if two parties are to be
observed entering into a voluntary private exchange, the presumption must be
that both feel the exchange is likely to make them better off, otherwise they
would not have entered into it." (p. 7) To rebut this presumption we have
to refer either to contracting failures or market failures. These constitute
(from an economic perspective) the reasons for the limits of freedom of contract.
What is
the role of contract law from an economic perspective?[8]
In general, it facilitates the voluntary (and well-informed) exchange of
well-defined and exclusive private property rights. First, it is a "check
on opportunism in non-simultaneous exchanges by ensuring that the first mover,
in terms of performance, does not run the risk of defection, rather than
co-operation, by the second mover." (p. 16) Second, it reduces transaction
costs.[9].
Third, it provides "a set of default or background rules where the terms
of a contract are incomplete" (p. 17). Forth, it distinguishes
welfare-enhancing and welfare-reducing exchanges.
Utilitarianism,
arguably the principal background philosophy of contemporary economics[10]
is used to be criticised on the basis that it accepts existing preferences as
given, it doesn’t offer "ethical criteria for disqualifying morally
offensive, self-destructive, or irrational preferences as unworthy of
recognition." If, on the contrary, economic theory acknowledges some
exceptions, as it must, in cases involving minors or mental incompetents, then
"some theory of paternalism is required, the contours of which are not
readily suggested by the private ordering paradigm itself." (p. 21)[11]
There
are also political justifications for the primacy of private ordering, which
are based on individual autonomy (negative liberty) "as a paramount social
value" (p. 8.). These liberal theories see the law of contracts as a
guarantee of individual autonomy. Trebilcock cites two other stances of
political philosophy, which are more ambivalent toward freedom of contract:
theories based on the positive (affirmative) concept of liberty which are
concerned with the fairness of distribution of welfare (equality) in society;
and communitarianism that emphasises the essentially social nature of man
(fraternity).
These
four theories partly cohere and converge but partly contradict each other. To
construct a normative theory of the law of contract and deduce arguments from
it for or against certain limits of freedom of contract, the complex
relationship "between autonomy values and welfare (end-state) values
(efficiency, utility, equality, community)" (p. 21) shall be cleared.
Throughout his book Trebilcock’s purpose is to demonstrate that the
"convergence claim" (i.e. that a market ordering and freedom of
contract simultaneously promote individual autonomy and social welfare) may be
robust in general but is false in certain details. The second main lesson he
explores is that there are problems (market failures) which cannot be appropriately
addressed judicially, i.e. in a contract law setting through private law
constraints on freedom of contract and he argues for a mix of policy
instruments (p. 248–261)[12]
The
main reasons for limiting freedom of contract are the fear of commodification
of certain goods and relations; the presence of third-party effects; of
coercion; imperfect information on behalf of one or both parties; supervision
and control of revealed preferences of the contracting parties for different
(paternalistic) reasons; the traditional common law rule of consideration which
raises, as Trebilcock notes, a partly different question, that of the
enforceability of promises[13];
and discrimination or antidiscrimination based on personal characteristics
(race, gender, etc.) and (which is not obvious) on nationality (international
trade restraints, immigration policy).
Commodification. Even in societies committed to political and
economic liberalism, there is room for debate about the scope of the market.
The critiques of the market paradigm may be (at least partly and superficially)
based, among others, on historical arguments (as by Károly Polányi or Patrick
Atiyah[14])
or may focus on heavily discussed questions of our days: "would permitting
the sale of votes or public offices, the sale of blood or body organs,
commercial surrogacy contracts, prostitution contracts or pornography undermine
values of human self-fulfilment or human flourishing?" (p. 19)
These
are, of course, not only the questions of the enemies of freedom and liberty.
As the Nobel-laureate economist, Kenneth Arrow has pointed out: "a private
property—private exchange system depends, for its stability, on the system’s
being non-universal."[15]
If political, legal and bureaucratic offices were auctioned off, their holders
freely bribed or votes freely bought and sold, the private sphere would be
massively destabilised. As it is well known, J. S. Mill argued in his On
Liberty against permitting voluntary self-enslavement.
The
main target of Trebilcock’s critique in this context is Margaret J. Radin’s
theory about commodification and inalienability.[16]
Radin, after raising five serious problems (market for new-borns, prostitution,
commercial surrogacy, employment regulation, residential tenancy regulation)
introduced two related concepts, which may be interesting to cite here. The double
bind effect refers to the problem that "in many contexts prohibiting
commodification or exchange may make the plight of the individual whose welfare
is central to the commodification objection actually worse." For example,
banning prostitution may eliminate an income-earning option of poor women. The
other concept, domino effect refers to an effect counterbalancing the
former, that "market rhetoric and manifestations [...] may change and
pervert the terms of discourse in which members of the community engage with
one another". (p. 25–26).
Trebilcock,
while acknowledging Radin’s efforts "to conceptualise the unarticulated
moral intuitions that many of us feel about many of the examples she uses"
(p. 26), demonstrates that her particular judgements are not in accord with her
general theory. There are further errors in the arguments similar to Radin’s:
the one is to "draw false correlations between internal values and
altruism and between external values and selfishness", another is to
neglect that altruism, reciprocity, and community are likely to be suppressed
not only by market forces but also by "coercive forms of redistribution
through the tax and transfer system that are central to the modern welfare
state." (p. 28–29) As an alternative approach, Trebilcock proposes to
structure the moral intuitions about the cited problems as contracting or
market failure problems (externalities, coercion, and information failures).
He than
goes on to compare the merits of these two approaches (Radin’s and his own)
through their consequences in different contexts. First, he analyses the
relative advantages and disadvantages of different modes of allocation of
scarce resources (e. g. of dialysis machines):[17]
markets, lotteries, queuing, voting (democracy), administration (based on
different merit criteria). As to the ethical problems of the transfer of human
body parts and foetal tissues, he proposes to cope with the organ scarcity by
creating a futures market in organs. Further, he compares the three most common
solution to the prostitution problem: criminalization, legalisation
(regulation), and decriminalisation to argue then for the latter.
While
comparing the typical arguments, he does not miss to note some subtle details.
For example, that there is a certain contradiction in the typical feminist
stance as "[i]n the context of separation agreements and entitlements on
marriage breakdown" "feminist theorists invoke market ideology and
advocate the commodification of [women’s household] services in the name of
equality and dignity, [i]n the context of surrogacy, however, the
commodification [...] is often viewed by feminists to be an erosion of a
woman’s dignity" (p. 48).
To sum
up this topic, Trebilcock argues for a significant role for private ordering,
for a careful design of default rules (emphasising the he claims "only a
partial insight or wisdom for the law and economics perspective", p. 57)
and for autonomy-enhancing public policies that broaden the access to market of
historically oppressed groups.
Externalities. Externalities mean imposition of costs
(negative) or benefits (positive) from a particular exchange transaction on non-consenting
third parties. Positive externalities pose incentive problems (lead to
suboptimal quantity of the good in question). Negative externalities are more
important and serious (e.g. pollution). In addition, there is no generally
accepted concept of the externality in economic theory. Autonomy-based theories
formulate the same negative effect under the name ‘harm’ (or, within another
category of Feinberg’s scheme: ‘offence’).
The
crucial conceptual problem is that third-party effects (externalities in
economics, harm in liberal theories) are pervasive. If all these effects
"should count in prohibiting the exchange process or in justifying
constraints upon it, freedom of contract would be largely at an end." (p.
58) Once one moves beyond rather tangible harms to third parties, many
activities might be viewed as generating some externality (imposes costs on
dependants, the social welfare system or the public health care system),
including "inadequate dietary or exercise regimens, excessively stressful
work habits, risky leisure activities." (p. 75)
Coercion. The seemingly simple question of what constitutes voluntary
consent to a transaction is a serious conceptual problem. Suppose that there is
full information, no cognitive deficiencies and the contract is complete. The
question is then, whether the constrained choice of a party renders his consent
involuntary. In one sense, all contracts are "coerced", because of
the pervasiveness of scarcity of resources and opportunities. But on the other
side, except for extreme cases (actual physical force, torture, hypnotic
trance) almost every exchange can be viewed as voluntary (coactus tamen
volui).
Rights
theorists define coercion by drawing "a basic distinction between threats
and offers. Threats reduce the possibilities open to the recipient of the
proposal, whereas offers expand them" (p.79) The difficulties arise,
however, in specifying the offeree’s baseline, against which the offer is to be
measured. This measure may be statistical (what he might reasonably expect),
phenomenological (what he in fact expects), or moral (what he is entitled to
expect). Trebilcock shows that "the distinction between threats and offers
depends on whether it is possible to fix a conception of what is right and what
is wrong, of what rights people have in contractual relations independent of
whether their contracts should be enforced." (p. 80)
Another
approach to coercion, elaborated by Benson from a Hegelian perspective, states
that "only equivalence in exchange fully respects [...] equal individual
autonomy (cases of gifts and voluntary assumptions of risk aside)" (p.
81). The Aristotelian perspective of Gordley is also a theory of substantive
fairness, it focuses on commutative or corrective justice which is
"designed to maintain the pre-existing distribution of wealth"
(ibid.)
The
third approach to coercion, that of Kronman could be called "modified
Paretian principle", in virtue of which "one would ask whether the
welfare of most people who are taken advantage of in a particular way is
likely, in the long-run, to be increased by permitting the kind of
advantage-taking in question in the particular case" (p. 82)
Buckley
has proposed anti-duress rules "in order to discourage parties from taking
excessive and wasteful precautions against being subjected to extortionate
contractual terms". To note, the two latter approaches are based on
hypothetical, rather than actual, consent and they invert the conventional
arguments of economists for voluntary exchanges (voluntariness implies
welfare-improvement).
The
fifth approach (literal Paretian principle) is that of law and economics
scholars and asks: "Does this transaction render both parties to it better
off, in terms of their subjective assessment of their own welfare, relative to
how they would have perceived their welfare had they not encountered each
other?" (p. 84)
A
magnificent example of Trebilcock’s argumentative strategy is when he reviews
several hypothetical situations (borrowed in part from the above-mentioned
theorists, in part Trebilcock’s own ideas) to test the normative implications
of the above-mentioned five theories for different cases of constrained choice.
I do not want to deprive the reader of the excitement of the search for the
right answer (if there is any), so I only repeat the questions: what are the
implications of these theories in the following cases?
(1)
The highwayman case (creation and exploitation of life-threatening risks: a
highwayman or mugger holds up a passerby confronting him with the proposition:
‘Your money or your life’ and the passerby commits himself to hand over the
money). (2) The tug and foundering ship case (exploitation but not creation of
life-threatening risks: a third party encounters the highwayman and the
passerby before the transaction is consummated and offers to rescue the
passerby for all his money, less one dollar. Or imagine the same situation
between a foundering ship on the stormy sea and a rescuing tug). (3) The dry
wells case (exploitation but not creation of life-threatening risks with one
supplier and many bidders: in a remote rural area all wells except from A’s dry
up in a drought and A auctions off drinking water to desperate inhabitants for
large percentages of their wealth. Or, the same sea situation with several
ships and one rescuer). (4) The Penny Black case (exploitation but not creation
of non-life-threatening situations: A comes across a rare stamp in his aunt’s
attic and sells it either to B expoiting his idiosyncratic intense preferences
or through a Sotheby’s auction to the highest bidder). (5) The lecherous
millionaire case (A agrees to pay for a costly medical treatment of B’s child
[or offers her an academic position or a promotion in the firm] in return for
B’s sexual favours). (6) The cartelized auto industry case (contrived
monopolies: major automobile manufacturers form a cartel to curtail drastically
consumers’ rights of action with respect to personal injuries). (7) The single
mother on welfare case (non-monopolised necessity: a person in necessity
contracts with another who lacks monopoly but the terms are especially
burdersome to the first, reflected in high risks and low return).
Trebilcock
argues, here again, for a "relative institutional division of
labour," in terms of which "the common law of contracts will be
principally concerned with autonomy issues in evaluating claims of coercion,
antitrust and regulatory law [with] issues of consumer welfare, and the social
welfare system [with] issues of distributive justice". (p. 101)
Asymmetric information
imperfections. The question here is: how much information is
required for the exercise of autonomous choices. Or stated differently, if one
party to a contract is substantially less well informed about some aspect of
the contract subject matter than the other, whether contracts should not be
enforced, or enforced on different terms, on that account. The problem is, of
course, that information is almost always imperfect.
In
common law terms, these information failure cases include fraud, negligent
misrepresentation, innocent misrepresentation and material non-disclosure.[18]
Trebilcock continues to contrast different theories, as in the previous
chapter. He also treats information processing disabilities or cognitive
deficiencies ("transactional incapacity" and "unfair
persuasion") and standard form contracts. With respect to the latter, it
is worth citing his warning (p. 119): "Simply observing the fact of
standard form contracts yield no meaningful implications as to the underlying
structure of the market. Indeed, we observe them being used in many settings
where manifestly the market is highly competitive. [...] [E]ven in the absence
of standard form contracts, we see many goods being offered on a take it or
leave it basis in some of the most competitive retail markets in the
economy."
Symmetric
information imperfections. Symmetric
information imperfections correspond to the domain of contract doctrines
relating to frustration, contract modification and mutual mistake. All these
doctrines define "the scope of permissible private or judicial adjustments
to contractual relationships in the light of new information." (p. 127)
Trebilcock
states that in long-term contracts there is a range of strategies for adjusting
the allocation of unknown and remote risks: explicit insurance, hedging in
futures markets, indexing clauses, ‘gross inequities’ clauses, arbitration
clause, etc. The absence of them imply reasonably that the promisor agreed to
assume the risk in question. (p. 130) He heavily criticises Posner’s approach
which implies that it is for the judge to determine which of the both parties
was the superior risk-bearer (insurer).
With
respect to contract modification there has been a change in common law:
traditional doctrine required fresh consideration to support an enforceable
contract modification, but contemporary legislative, judicial and academic
thinking applies a presumption of validity of modifications. Trebilcock favours
the traditional view because, in contrast to the recent static view it reflects
dynamic efficiency consideration, an ex ante perspective. Namely, it
stresses that no constraints on recontracting may increase incentives to
opportunistic behaviour where "hold-up" problems arise during
performance: allowing recontracting may facilitate the reallocation of assigned
risks that were initially assigned efficiently. (p. 168–170) He would allow
recontracting only if "it is not possible to determine the efficient
initial allocation of risk or where the risk in question [...] was so remote
that the expected costs of bearing it would have minimal incentive
effects." (p. 138).
Trebilcock makes some short detours in the book to
define a much-discussed concept of economic analysis of law: the efficient
breach of contract. (p. 142–143, 166–167, 184–186). This theory would permit
unilateral breach to the party who has discovered a more profitable opportunity
for the resources dedicated to performance, supposed that the breaching party
compensates the other for his full expectancy losses. This breach is
Pareto-superior (nobody is worse-off, some are better-off). Robin West, one of
the critics of efficiency approach makes the objection that (1) "it
encourages uncivil, unilateral, uncooperative attitudes towards contractual
relationships" and (2) it deprives the non-breaching party of the
possibility of sharing in the gains of the new opportunity "which a negotiated
release from performance would engender”. (p. 142)
I
think, this point need some more elucidation.[19]
The thought behind "efficient breach of contract" is reflecting the
"bad man’s" view of law, to use Oliver Wendell Holmes’ famous phrase.
In this view, when a contract is made, the promisor is not obligated to
perform but he has a choice either to perform or to pay damages instead to the
breached-against party. Beyond the question whether this perspective eliminates
the moral dimensions of a legal contract, this choice between delivery and
damages raises another question: whether and how the breach of contract of one
party may be efficient at all. In other words, which contract remedy leads to
an outcome that maximises the joint net gains of the parties.
Let’s
see a simple example. A seller, S can produce a good for $150. The good is not
generally available. Therefore, a buyer, B1 enters into a contract with S for
future delivery. The contract price is paid in advance. B1 values the good at
$200. B1 makes an expenditure of $10 prior to delivery (reliance investment,
R1) which is necessary for him to use the purchased good. If the contract is
not completed, R1 has no value to B1. B1 has a choice: if he makes an
additional investment (R2) of $24 and the good is delivered, he gains a sum of
$30. (Else, R2 has no value.) For the moment it is assumed that both S and B1
are risk neutral, i.e. they care only about the expected value of the risky
situation. (For example, both are indifferent between a gain or loss of $100
for sure and a gain or loss of $1000 with a probability of 10%.)
Before
delivery there is a chance that another buyer (B2) wants to purchase the same
good and offers a sum of either $0, $180 or $250. (For simplicity we assume
that these values are equally likely and are the same as the amount B2
evaluates the good in each case.) Both S and B1 are aware of the possibility
that S2 may offer more for the good than B1 does.
The case
of fully specified contract. Economic theory assumes that if S and B1 could
bargain costlessly and with full information, they would end up in an efficient
situation. Let’s see what does it mean in this case.
First
we deal only with R1. The contract price must be between $150 and $190
($200–$10). The exact value is determined by the relative bargaining force of S
and B1. Suppose that this price is $175. It is easy to demonstrate that the
efficient contract includes a provision that in the event that B2 values the
good at $0 or $180, S has to sell the good to B1. If B2 values the good at
$250, S is to sell it to B1 and at the same time S has to pay damages (for
breach of contract) to him. Say, the amount S pays to B1 equals $225. To prove
the efficiency of the breach of contract, let’s consider the joint profit of S
and B1. (Given that B2 offers the same amount as he values the good, his profit
is not affected so it is not to be taken into account in determining the
efficient contract provision.) If S sells to B1 and B2 offers $180, the joint
profit is $40 ($175–$150=$25 for S + $200–$175–$10=$15 for B1). If S sold the
good in this case to B2, the joint profit would fall to $20 ($180 revenue less
$150 production cost less $10 of R1). When B2 offers $250 there are also two
cases. If S sells to B2, the joint profit is $90 ($175+$250–$150–$225=$50 for S
+ $225–$175–$10=$40 for B1). If, however, S does not breach, the joint profit is
only $40, as we have seen.
It is
worth noting that there is a positive relation between the contract price and
the ‘damages’ paid. If S had to pay more than $225 in case of breach, he would
only contract for a higher price.
In a
second turn let’s discuss what would be provided in a fully specified, i.e.
efficient contract about R2. It might seem reasonable to think that it is
efficient to invest $24 in order to get $30. But it should be kept in mind that
this is the case only if S delivers the good. As we have seen, in the case of
the $250 offer, efficiency dictates breach. So, given that the delivery occurs
only with a probability of 2/3 (and that B1 is risk-neutral) the expected gain
is only $20, therefore it is efficient to include a provision in the contract
that forbids reliance investment R2.
I
stress again that all the above-mentioned provisions presuppose that bargaining
and information is costless. For example it may be difficult for S to detect
B1’s gain from R2 or the parties may underestimate the probability that another
purchaser, B2 offers more than B1. So, as is noted above it is reasonable to
think, that legal rules are needed to regulate the issues raised by the breach
of contract.
Three
contract remedies and their efficiency. In a real
world situation there operates a legal system to deal with breaches of
contract. The breacher must compensate the breached-against party for damages.
But which type of remedy is the optimal? The efficiency of the expectation,
reliance and restitution remedies is examined in the same way: whether they
lead to the same outcome as the fully specified contract analysed above.
Under
the expectation remedy (ER), in case of S’s breach B1 can recover the amount
that puts him in the same position that he would have been if the contract had
been completed. Thus, B1 is compensated $200. (He has already paid the contract
price and R1.) Given that S has to pay $200, he breaches only if S2 offers
$250. So, in this respect, ER is efficient. It saves the costs of bargaining or
in general of dealing with such rare contingencies as a competing purchaser who
offers more. ER is independent of the contract price (which is showed to be
between $150 and $190) and motivates S to breach if and only if B2 offers more
than the value B1 attaches to the good. At the same time ER is inefficient with
respect to R2. It gives B1 an incentive to invest $24 regardless of B2’s offer,
since ER would compensate B1 with a sum of $230 in case of breach.
The
reliance remedy (REL) puts the breached-against party in the position he would
have been in if he had never entered into contract initially. In other words,
after a breach S has to pay B1 the contract price and the reliance cost. The
REL would be efficient if these two costs sum up to more than $180. But there
is no guarantee that this will be the case, since the contract price is
theoretically undetermined and may vary between $150 and $190. Adding the $10
of R1, the minimum of REL is $160, thus it cannot (always) exclude an
inefficient breach. On the same ground as under ER, REL is inefficient with
respect to R2. This remedy would allow a riskless gain to B1 and would lead to
excessive reliance investment.
Under
the restitution remedy (RES) the buyer can recover any benefit that he has
conferred on the seller. In our example, RES corresponds to the contract price.
For the same reasons as by REL, RES will be inefficient if the contract price
is under $180 since in this case it motivates S to breach even if B1 values the
good more than B2. While RES is not efficient in this respect, it can be showed
that it operates as the complete contract with respect to R2. It is so because
RES makes R2 worthwhile only it the expected value of his reliance investment
exceeds its cost, since B1 cannot recover for reliance costs under RES and he
must calculate the respective probability of performance and breach. (However,
it is not evident that S breaches only if it is efficient. But if so, only RES
will lead to the efficient amount of reliance investment, ER and REL will not.)
There
remain only three things to mention. First, another possible remedy would be
liquidated damages. Under this remedy the buyer can recover in case of breach a
sum agreed upon in advance. It can be proved to lead to an optimal allocation of
the risk of the ‘efficient breach’ (the appearance of B2) between the parties.
But liquidated damages agreement is not enforceable if courts consider the sum
too high, penalty-like. Second, the system of contractual damages presupposes
that the courts can easily estimate, for example the value of the contract for
B1 in case of ER or the reliance costs in case of REL. The information which a
court can determine most simply is, of course, the contract price. So, some
sort of information (transaction) cost must be taken into account. Finally, we
have to answer the question, which contract remedy leads to efficiency in case
of breach of contract. In general the answer depends on the relative importance
of the breach decision of S, the reliance decision of B1 and the risk
allocation between them. The first is optimal under ER, the second under RES,
the third most probably under liquidated damages. In the numerical example used
before, the first aspect is more important than the second since the difference
between B1’s evaluation ($200) and B2’s evaluation ($180) is higher than the $4
loss coming from the inefficient reliance R2. But, again the most expensive
remedy is ER because of its information requirements.
The title of Trebilcock’s book is a bit misleading: it
is not a traditional legal treatise on state regulations or legal rules
limiting freedom of contract. The ambition of the author is to explore the
normative implications of current moral and political philosophies (and
contrast them with our moral intuition and legal rules in force) regarding to
fine details of the law of contracts. In doing this, he is "concerned with
congruencies and conflicts between" the philosophical perspectives (p. 16)
and shows that neither autonomy-based theories nor different sorts of
utilitarianism nor communitarianism can offer alone a coherent theory about
freedom of contract. In addition, there are problems which cannot be
efficiently dealt with in a private law setting, i.e. the plurality of our
theories represent confronting purposes which can be achieved only by a
plurality of institutions. (p. 240–261)
As the
author stressed in the Preface (p. v), the plan of this book rests on three
main considerations. First, "a concern, that much law and economics
scholarship is far too unself-critical in assuming that particular normative
values are or ought to be vindicated by the law of contracts and the underlying
economic institutions of private markets." Second, a critique of the
standard treatment of the law of contracts in legal education (let me add, not
only in Canada[20]
but also in Hungary) "as a body of largely technical, desiccated legal
doctrines" without acknowledging the social role and the underlying value
conflicts of these institutions. Third, a warning (already in 1993) that the
transition of Central and Eastern Europe to capitalism and democracy shall make
not only these but also Western countries self-conscious about these values
without an unwarranted sense of triumph and complacency "that the end of
history has arrived".
I think
that the aspiration of Trebilcock, to examine imaginatively and self-critically
"the role of the law of contracts in a market economy" has been
excellently fulfilled.[21]
Hungarian legal scholarship should still today learn from him a lot.
Arrow, K. J. 1997.
‘Invaluable Goods’ Journal of Economic Literature XXXV (June 1997) 2,
757–765
Ayres, I. 1995.
[Review of] ‘Michael J. Trebilcock: The Limits of Freedom of Contract’ Journal
of Economic Literature XXXIII (June 1995) 2, 865–866
Backhaus, J. G. 1999.
The Elgar Companion to Law and Economics Cheltenham: Elgar
Baird, D. G. —
Gertner, R. H. — Picker, R. C. 1994. Game Theory and the Law Cambridge,
Mass.: Harvard University Press
Bíró, Gy. 1999. A
kötelmi jog és a szerz?déstan közös szabályai [The Common Rules of
the Law of Obligations and Contract Law] Miskolc: Novotni Alapítvány a Magánjog
Fejlesztéséért
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Geest, G. (eds.) 2000. Encyclopedia of Law and Economics Vol. 1-5.
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Brownsword, R. 1995.
‘The Limits of Freedom of Contract and the Limits of Contract Theory’ Journal
of Law and Society 22 (June 1995) 2, 259–273
Coleman, J. L. — Lange, J. (eds.) 1992. Law and Economics Vol.
1–2. Aldershot, Hong Kong, Singapore, Sydney: Dartmouth [The International
Library of Essays in Law and Legal Theory]
Cooter, R. — Ulen, T.
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Craswell, R. 1995. Freedom
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[Jurisprudence, Policy and Sociology of Law in the Economic Analysis of Law]
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Cserne, P. 2001a. ‘Epistemology, social theory, social
reserarch’ Review of Sociology 7 (2001) 1, 143–150
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Rakoff, T. D. 1996.
[Review of] ‘Michael J. Trebilcock: The Limits of Freedom of Contract’ Michigan
Law Review 94 (1996 May) 6, 1799–1809
Sajó, A. — Harmathy,
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Sólyom, L. 2001. Az
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Trebilcock, M. J.
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Varga, Cs. 2002. ‘Az
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Közlöny LVII (2002. július-augusztus) 7–8, 309–322
Vékás, L. 1998. ‘A
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[1] Craswell 1995: 1.
[2] See Sólyom 2001: 126–140, 426–428, 651–653 and Vékás 1999.
[3] See, e. g. Bíró 1999: 238–250.
[4] Sajó 2002.
[5] Trebilcock 1993. Page numbers in the text refer to this book.
[6] On economic analysis of law in general, see Backhaus 1999, Bouckaert—De Geest 2000, Coleman—Lange 1992, Cooter—Ulen 1999, Hirsch 1999, Newman 1998, Polinsky 1989, Posner 1998, Posner—Parisi 1997, Veljanovski 1990. In Hungarian: Cserne 2001, Sajó—Harmathy 1984, Vékás 1999.
[7] Robert Heilbroner The Making of Economic Society (1975), cited in Trebilcock 1993: 271. n. 2.
[8] For a brief summary see Kronman—Posner 1979: 1–7.
[9] On conceptual problems of transaction costs see Cserne 2001, Appendix A.
[10] It is at least so in the communis opinio both among philosophers and economists and Trebilcock agrees too. However, that is not obviously right. (On this see Cserne 2001, pt 3, Cserne 2001a: 148–149) Economic analysis of law, in its normative version, undoubtedly represents a consequentialist approach.
[11] On paternalism see ch. 7 (pp. 147–163) in Trebilcock 1993.
[12] See Komesar 1994, Posner 1998. ch. 19.
[13] On this see Sajó 2002.
[14] For details, references and counter-arguments see Trebilcock 1993: 18–19, 272.
[15] Cited in Trebilcock 1993: 23.
[16] For a more recent book-length version of her theory see Radin 1996, for its critique: Arrow 1997.
[17] The classic exposition of this problem is Tragic Choices by Calabresi and Bobbitt (1978). See further Elster 1992.
[18] See the same cases from a game-theoretical perspective: Baird—Gertner—Picker 1994,. ch. 5–6.
[19] The numbers in the following example are from Polinsky 1989, ch. 5 and 8.
[20] For a recent Hungarian view on current legal problems in Canada as reflected in the jurisprudence, see Varga 2002.
[21] As approval, see the review articles: Ayres 1995, Brownsword 1995, Rakoff 1996.