Law Commons^™

Contract Design When Relationship-Specific Investment Produces Asymmetric Information, Albert H. Choi, George Triantis

Articles

Under conventional contract theory, contracts may be efficient by protecting relationship specific investment from holdup in subsequent (re)negotiation over terms of trade. This paper demonstrates a different problem when specific investment also provides significant private information to the investing party. This is fairly common: for example, a manufacturer invests to learn about its buyer's idiosyncratic needs or a collaborator invests to learn about a joint venture. We show how such private information can lead to subsequent bargaining failure and suboptimal ex ante relationship-specific investment. We also show that this inefficiency is worse if the parties enter into a binding and …

Consumer Psychology And The Problem Of Fine Print Fraud, Roseanna Sommers, Meirav Furth-Matzkin

Articles

This Article investigates consumers' beliefs about contracts that are formed as a result of fraud. Across four studies, we asked lay survey respondents to judge scenarios in which sellers use false representations to induce consumers to buy products or services. In each case, the false representations are directly contradicted by the written terms of the contract, which the consumers sign without reading. Our findings reveal that lay respondents, unlike legally trained respondents, believe that such agreements are consented to and will be enforced as written, despite the seller's material deception. Importantly, fine print discourages consumers from wanting to take legal …

The Private Law Critique Of International Investment Law, Julian Arato

Articles

This Article argues that investment treaties subtly constrain how nations organize their internal systems of private law, including laws of property, contracts, corporations, and intellectual property. Problematically, the treaties do so on a one-size-fits-all basis, disregarding the wide variation in values reflected in these domestic legal institutions. Investor-state dispute settlement exacerbates this tension, further distorting national private law arrangements. This hidden aspect of the system produces inefficiency, unfairness, and distributional inequities that have eluded the regime's critics and apologists alike.

Mandatory Arbitration In Consumer Finance And Investor Contracts, Michael S. Barr

Book Chapters

This chapter focuses on the use of mandatory pre-dispute arbitration clauses in a subset of consumer contracts – those involving consumer finance and investor products and services. Arbitration clauses are pervasive in financial contracts – for credit cards, bank accounts, auto loans, broker-dealer services, and many others. In the wake of the recent financial crisis, Congress enacted the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank). Dodd-Frank authorises the new Consumer Financial Protection Bureau (CFPB) and the Securities and Exchange Commission (SEC) to prohibit or condition the use of arbitration clauses in consumer finance and investment contracts, …

Mandatory Arbitration In Consumer Finance And Investor Contracts, Michael S. Barr

Articles

Mandatory pre-dispute arbitration clauses are pervasive in consumer financial and investor contracts—for credit cards, bank accounts, auto loans, broker-dealer services, and many others. These clauses often ill serve households. Consumers are typically presented with contracts on a “take it or leave it” basis, with no ability to negotiate over terms. Arbitration provisions are often not clearly disclosed, and in any event are not salient for consumers, who do not focus on the importance of the provision in the event that a dispute over the contract later arises, and who may misforecast the likelihood of being in such a dispute. The …

The Dog That Didn't Bark: Private Investment Funds And Relational Contracts In The Wake Of The Great Recession, Robert C. Illig

Michigan Business & Entrepreneurial Law Review

In the aftermath of the subprime mortgage crisis, the contract rights of numerous hedge funds and venture capital funds were breached. These contracts were complex and sophisticated and had been negotiated at great time and expense. Yet despite all of the assumptions of neo-classical contracts theory, nothing happened. Practically none of these injured parties sued to enforce their rights. Professor Illig uses this dearth of litigation to conduct a form of natural experiment as to the value of contract law. Discrete market participants contracted before the crash and then pursued their rights in court afterwards, while relational market participants contracted …

Ability To Pay, John A. E. Pottow

Law & Economics Working Papers

The landmark Dodd-Frank Act of 2010 transforms the landscape of consumer credit in the United States. Many of the changes have been high-profile and accordingly attracted considerable media and scholarly attention, most notably the establishment of the Consumer Financial Protection Bureau (CFPB). But when the dust settled, one profoundly transformative innovation that did not garner the same outrage as CFPA did get into the law: imposing upon lenders a duty to assure borrowers’ ability to repay. Ensuring a borrower’s ability to repay is not an entirely unprecedented legal concept, to be sure, but its wholesale embrace by Dodd-Frank represents a …

Foreword: Fault In American Contract Law, Omri Ben-Shahar, Ariel Porat

Michigan Law Review

The basic rule of liability in tort law is fault. The basic rule of liability in contract law is no fault. This is perhaps one of the most striking divides within private law, the most important difference between the law of voluntary and nonvoluntary obligations. It is this fault line (speaking equivocally) that the present Symposium explores. Is it a real divide-two opposite branches of liability within private law-or is it merely a rhetorical myth? How can it be justified? As law-and-economics scholars, this fault/no-fault divide between contract and tort is all the more puzzling. In law and economics, legal …

How To Repair Unconscionable Contracts, Omri Ben-Shahar

Law & Economics Working Papers Archive: 2003-2009

Several doctrines of contract law allow courts to strike down excessively one-sided terms. A large literature explored which terms should be viewed as excessive, but a related question is often ignored—what provision should replace the vacated excessive term? This paper begins by suggesting that there are three competing criteria for a replacement provision: (1) the most reasonable term; (2) a punitive term, strongly unfavorable to the overreaching party; and (3) the maximally tolerable term. The paper explores in depth the third criterion—the maximally tolerable term—under which the excessive term is reduced merely to the highest level that the law considers …

Greed And Pride In International Bankruptcy: The Problems And Proposed Solutions To “Local Interests”, John A. E. Pottow

Law & Economics Working Papers Archive: 2003-2009

From just-enacted (2005) chapter 15 of the U.S. Bankruptcy Code to the U.K. Enterprise Act of 2002, legislative reforms to international bankruptcy are on the rise. One of the thorniest issues facing scholars and policymakers alike in these efforts is what to do with the nettlesome problem of “local interests.” What exactly are these “local interests,” and what is it that we are we trying to protect? Literature to date has been elusive in pinning this down and has offered, for the most part, only undifferentiated anxiety that an international bankruptcy regime may impinge undesirably upon “local concerns.” This article …

Boilerplate And Economic Power In Auto Manufacturing Contracts, Omri Ben-Shahar, James J. White

Articles

This Article is structured as follows. Part I compares the terms and conditions in the purchase orders of the Original Equipment Manufacturers (OEMs) and highlights important differences in the substance of these boilerplate provisions. It argues that these differences cannot be easily reconciled with the prediction that sophisticated parties draft the most efficient boilerplate terms. Part II examines how these forms are drafted, how their terms are negotiated, and how the OEMs guard their terms from erosion. It provides some insight on how tailoring occurs and how the internal organization of a party to a deal affects the terms that …

"Boilerplate": An Introduction, Omri Ben-Shahar

Law & Economics Working Papers Archive: 2003-2009

This short essay introduces the themes that are developed in twelve articles that were delivered recently in a symposium on “Boilerplate: Foundations of Market Contracts” at the University of Michigan Law School. The proceeding of the symposium will be published in Volume 104 of the Michigan Law Review.

Boilerplate And Economic Power In Auto Manufacturing Contracts, Omri Ben-Shahar, James J. White

Law & Economics Working Papers Archive: 2003-2009

This article studies the standard form contracts used by automobile manufacturers to purchase auto parts. It explores how the contracts reflect divisions of bargaining power, asymmetric information, problems of hold-up and renegotiation, and market competition. Based on interviews with representatives of buyers and suppliers, the article also describes the process of drafting the forms, the negotiation over price and other terms in the shadow of these forms, and the opportunities for non-drafters to extract improved terms. Some of the main lessons are: (i) The terms of the contracts and the bidding process prevent ex-post hold-up by suppliers (in contrast to …

An Ex-Ante View Of The Battle Of The Forms: Inducing Parties To Draft Reasonable Terms, Omri Ben-Shahar

Law & Economics Working Papers Archive: 2003-2009

This paper focuses on one type of ex-ante effect of the battle of the forms: the incentive to draft reasonable boilerplate terms. It argues that the experience with the battle-of-the-forms rule under the CISG reinforces what we already know, that existing legal solutions do not provide any incentive for the parties to draft reasonable forms. The paper suggests that the goal of inducing parties to draft reasonable terms can be significantly promoted by a third rule, a variant of the “best-shot” rule proposed by Victor Goldberg. Under the version labeled the “reasonable-shot” rule, the court would resolve the battle of …

Credible Coercion, Oren Bar-Gill, Omri Ben-Shahar

Law & Economics Working Papers Archive: 2003-2009

The ideal of individual liberty and autonomy requires that society provide relief against coercion. In the law, this requirement is often translated into rules that operate “post-coercion” to undo the legal consequences of acts and promises extracted under duress. This Article argues that these ex-post anti-duress measures, rather than helping the coerced party, might in fact hurt her. When coercion is credible—when a credible threat to inflict an even worse outcome underlies the surrender of the coerced party—ex post relief will only induce the strong party to execute the threatened outcome, to the detriment of the coerced party. Anti-duress relief …

"Agreeing To Disagree": Filling Gaps In Deliberately Incomplete Contracts, Omri Ben-Shahar

Law & Economics Working Papers Archive: 2003-2009

This Article develops a new standard for gap filling in incomplete contracts. It focuses on an important class of situations in which parties leave their agreement deliberately incomplete, with the intent to further negotiate and resolve the remaining issues. In these situations, neither the traditional no-enforcement result nor the usual gap filling approaches accord with the parties’ partial consent. Instead, the Article develops the concept of pro-defendant gap-fillers, under which each party is granted an option to enforce the transaction supplemented with terms most favorable (within reason) to the other party. A deliberately incomplete contract with pro-defendant gap fillers transforms …

Measuring Recovery For Non-Contractual Investment, Omri Ben-Shahar, Robert A. Mikos

Law & Economics Working Papers Archive: 2003-2009

Parties who make investments that generate externalities may sometimes recover from the beneficiaries, even in the absence of contract. Previous scholarship has shown that granting recovery, based on either the cost of the investment or the benefit it confers, can provide optimal incentives to invest. However, this article demonstrates that the law often awards recovery that is neither purely cost-based, nor purely benefit-based, and instead equals either the greater-of or lesser-of the two measures. These hybrid approaches to recovery distort incentives to invest. The article demonstrates the prevalence of these practices, and explores informational and related reasons why they emerge. …

Drafting The Dispute Resolution Clause, Whitmore Gray

Book Chapters

Providing in a contract for ways to resolve disputes that may arise presents a substantial challenge to the lawyer. In one sense, this is what a lawyer regularly does in contract drafting-anticipating misunderstandings or problems that experience has indicated are likely to arise, and trying to provide clear solutions in advance. When it comes to drafting a specific clause for the resolution of further disputes that may arise, however, many lawyers are at a substantial disadvantage. The task comes at the end of the substantive negotiations. The client does not want to focus on, or draw the other party's attention …

Williston: A Treatise On The Law Of Contracts, Collins J. Seitz

Michigan Law Review

A Review of A Treatise on the Law of Contracts. By Samuel Williston.

Conflict Of Laws--The Law Controlling The Validity Of A Married Woman's Contract, Victor H. Lane

Articles

The case of Poole v. Perkins (Va.), IO S. E. 240, involves that troublesome question of whether the validity of a contract is to be ruled by the law of the place where made, or by that of the place of performance.

Contracts For The Benefit Of A Third Person In Michigan, Grover C. Grismore

Articles

In the recent case of Preston v. Preston the supreme court of Michigan had occasion to consider the question as to whether or not one for whose benefit a contract is made has any enforcible rights. The suit was one 'in Chancery, the donee plaintiff was an invalid, and every consideration of justice and equity demanded that she be given relief. The court had, however, to face the fact that in recent cases it had indicated its opinion to be that the third party beneficiary has no rights. In Modern Maccabees v. Sharp, (1910) 163 Mich. 449, 456 the court …

The 'Right' To Break A Contract, Willard T. Barbour

Articles

It is common knowledge that the fully developed common law affords no means to compel the performance of a contract according to its terms. Does it follow from this that there is no legal obligation to perform a contract, or if obligation there be, that it is alternative: to perform or pay damages? A note in the XIV MICH. L. REV. 480 appears to give an affirmative answer to this question and at least one court (Frye v. Hubbell, 74 N. H. 358, at p. 374) has taken the same view. Probably the most forcible exposition of this position is …

The 'Right' To Break A Contract, Willard T. Barbour

Articles

It is common knowledge that the fully developed common law affords no means to compel the performance of a contract according to its terms. Does it follow from this that there is no legal obligation to perform a contract, or if obligation there be, that it is alternative: to perform or pay damages? A note in the XIV MICH. L. REV. 480 appears to give an affirmative answer to this question and at least one court (Frye v. Hubbell, 74 N. H. 358, at p. 374) has taken the same view. Probably the most forcible exposition of this position is …

Invalid Contracts For Contingent Fees, James H. Brewster

Articles

It is not unusual that agreements between attorneys and clients providing for contingent fees contain a stipulation to the effect that no settlement of the controversy concerning which there is a bargain for fees shall be made by the client without the attorney's consent. In the recent case of Davy et at. v. Fidelity and Casualty Ins. Co., 85 N. E. 504, the Supreme Court of Ohio condemns such an agreement as champertous and, by the citation of many Ohio decisions, "demonstrates that this court has always maintained a consistent and unambiguous attitude in regard to contracts of the kind …

Freedom Of Contract, Jerome C. Knowlton

Articles

The liberty mentioned in the Fourteenth Amendment of the Federal Constitution "means not only the right of the citizen to be free from the mere physical restraint of his person, as by incarceration, but the term is deemed to embrace the right of the citizen to be free in the enjoyment of all his faculties; to be free to use them in all lawful ways; to live and work where he will; to earn his livelihood by any lawful calling; to pursue any livelihood or avocation, and for that purpose to enter into all contracts which may be proper, necessary …

Outlines Of The Law Of Agency, Floyd R. Mechem

Books

The subject of Agency belongs to a comparatively recent period in our law … Agency belongs distinctively to a commercial age, and its growth has kept pace with the progress of commercial development. It furnishes the means by which the range of individual and corporate activity is enormously increased. As soon as it is conceded that one man may be represented by another in business transactions, and that he may have as many such representatives as occasion may require, the field of commercial activity is immensely widened. The modern business man may thus be constructively present in many places and …

Outlines Of The Law Of Agency, Floyd R. Mechem

Books

The subject of Agency belongs to a comparatively recent period in our law … Agency belongs distinctively to a commercial age, and its growth has kept pace with the progress of commercial activity. It furnishes the means by which the range of individual and corporate activity is enormously increased. One person may thus have many an alter ego. A single brain may direct a hundred hands. The modern business man may be constructively present in many places and carry on diverse and widely separated industries at the same time.

The following pages have been printed to accompany the writer’s …

A Treatise On The Law Of Sale Of Personal Property, Volume I, Floyd R. Mechem

Books

When this task was undertaken the writer believed that there was a real need for an American book upon the law of Sale. In the long time that he bas been at work, various contributions to the subject have been made by others, so that it is possible that the need, if it ever existed, has long since been supplied. The writer, however, whether wisely or unwisely, has persisted in his undertaking, and if bis work shall prove to have a value in some degree commensurate with the labor spent upon it, he will be content.

A Treatise On The Law Of Sale Of Personal Property, Volume Ii, Floyd R. Mechem

Books

When this task was undertaken the writer believed that there was a real need for an American book upon the law of Sale. In the long time that he bas been at work, various contributions to the subject have been made by others, so that it is possible that the need, if it ever existed, has long since been supplied. The writer, however, whether wisely or unwisely, has persisted in his undertaking, and if bis work shall prove to have a value in some degree commensurate with the labor spent upon it, he will be content.

Cases On The Law Of Agency, Floyd R. Mechem

Books

The following collection of cases has been prepared, at the request of several leading educators, to accompany the writer’s treatise on the law of agency, the purpose being to illustrate the text by object lessons gathered from the reports. Nothing in the way of annotation has been attempted, beyond an occasional reference to similar cases, as it is thought that the text of the treatise supplies all that is needed in that direction. To make a selection of cases from the great number upon the subject is a difficult task and one in reference to which opinions will necessarily differ. …