Law Commons^™

The Economics Of Leasing, Thomas W. Merrill

Faculty Scholarship

Leasing may be the most important legal institution that has received virtually no systematic scholarly attention. Real property leasing is familiar in the context of residential tenancies. But it is also widely used in commercial contexts, including office buildings and shopping centers. Personal property leasing, which was rarely encountered before World War II, has more recently exploded on a world-wide basis, with everything from autos to farm equipment to airplanes being leased. This article seeks to develop a composite picture of the defining features of leases and why leasing is such a widespread and highly successful economic institution. The reasons …

Revising Boilerplate: A Comparison Of Private And Public Company Transactions, Stephen J. Choi, Robert E. Scott, G. Mitu Gulati

Faculty Scholarship

The textbook model of commercial contracts between sophisticated parties holds that terms are proposed, negotiated and ultimately priced by the parties. Parties reach agreement on contract provisions that best suit their transaction with the goal of maximizing the joint surplus from the contract. The reality, of course, is that the majority of the provisions in contemporary commercial contracts are boilerplate terms derived from prior transactions and even the most sophisticated contracting parties pay little attention to these standard terms, focusing instead on the price of the transaction. With standard-form or boilerplate contracts, this dynamic of replicating by rote the terms …

Innovation Versus Encrustation: Agency Costs In Contract Reproduction, Stephen J. Choi, Mitu Gulati, Robert E. Scott

Faculty Scholarship

This article studies the impact of exogenous legal change on whether and how lawyers across four different deal types revise their contracts’ governing law clauses in order to solve the problem that the legal change created. The governing law clause is present in practically every contract across a wide range of industries and, in particular, it appears in deals as disparate as private equity M&A transactions and sovereign bond issuances. Properly drafted, the clause increases the ex ante economic value of the contract to both parties by reducing uncertainty and litigation risk. We posit that different levels of agency costs …

The Paradox Of Contracting In Markets, Robert E. Scott

Faculty Scholarship

Traditional economic analysis distinguishes economic organization along three dimensions: firm, contract, and market. This categorization is misleading in any number of respects, but none more so than the assumption that contract and market are separate modes of exchange. In fact, other than barter, which is almost unknown in contemporary commercial transactions, every market transaction is implemented by contract. Thus, in markets the two modes of exchange are inextricably combined. Moreover, the vast majority of contract activity occurs in some form of market, so it does not require much loss of generalization to say that not only are contracts in all …

Foreign Contracts And U.S. Copyright Termination Rights: What Law Applies? – Comment, Richard Arnold, Jane C. Ginsburg

Faculty Scholarship

The U.S. Copyright Act gives authors the right to terminate assignments of copyrights in works other than works for hire executed on or after 1 January 1978 after 35 years, and to do so notwithstanding any agreement to the contrary. Given that agreements which are subject to the laws of other countries can assign U.S. copyrights, and purport to do so in perpetuity, U.S. law’s preclusion of agreements contrary to the author’s right to exercise her termination right can give rise to a difficult choice of law issue. Two recent cases which came before courts in the U.S. and England …

Contractual Arbitrage, Stephen J. Choi, G. Mitu Gulati, Robert E. Scott

Faculty Scholarship

Standard-form contracts are likely to be incomplete because they are not tailored to the needs of particular deals. In an attempt to reduce incompleteness, standard-form contracts often contain clauses with vague or ambiguous terms. Terms with indeterminate meaning present opportunities for strategic behavior well after a contract has been executed. This linguistic uncertainty in standard-form commercial contracts creates an opportunity for “contractual arbitrage”: parties may argue ex post that the uncertainties in expression mean something that the contracting parties did not contemplate ex ante. This chapter argues that the scope for contractual arbitrage is a direct function of the techniques …

Freedom, Choice, And Contracts, Hanoch Dagan, Michael A. Heller

Faculty Scholarship

In “The Choice Theory of Contracts,” we explain contractual freedom and celebrate the plurality of contract types. Here, we reply to critics by refining choice theory and showing how it fits and shapes what we term the “Contract Canon”.

I. Freedom. (1) Charles Fried challenges our account of Kantian autonomy, but his views, we show, largely converge with choice theory. (2) Nathan Oman argues for a commerce-enhancing account of autonomy. We counter that he arbitrarily slights noncommercial spheres central to human interaction. (3) Yitzhak Benbaji suggests that choice theory’s commitment to autonomy is overly perfectionist. Happily, in response to Benbaji, …

The Middleman’S Damages Revisited, Victor P. Goldberg

Faculty Scholarship

If A promises to sell to B who, in turn, promises to sell to C and either A or C breaches should B receive the gain it expected had both transactions occurred (lost profits) or the larger market/contract differential? Recent case law and commentary argues for the lost profit remedy. The argument is that there is a conflict between awarding market damages and making the nonbreacher whole. This paper argues that there is no conflict. If B were a broker, and C breached, then A would have an action against C for market damages. If B were party to the …

Autonomy For Contract, Refined, Hanoch Dagan, Michael A. Heller

Faculty Scholarship

In The Choice Theory of Contracts, we advance a claim about the centrality of autonomy to contract. This Issue offers thoughtful and penetrating critiques. Here, we reply. Autonomy is the grounding principle of contract. In Choice Theory, we stressed the (1) proactive facilitation component of autonomy, in particular, the state’s obligation regarding contract types. Here, we highlight two additional, necessary implications of autonomy for contract: (2) regard for future selves and (3) relational justice. These three aspects of autonomy shape the range, limit, and floor, respectively, for the legitimate use of contract. They provide a principled and constrained path for …

Why Autonomy Must Be Contract's Ultimate Value, Hanoch Dagan, Michael A. Heller

Faculty Scholarship

In “The Choice Theory of Contracts”, we develop a liberal theory of contract law. One core task of the book was to persuade advocates of economic analysis that they must situate their enterprise within our liberal framework. Autonomy, rightly understood, is the telos of contract.

Oren Bar-Gill pushes back strongly in “Choice Theory and the Economic Analysis of Contracts”. He offers a penetrating – perhaps devastating – critique of our approach. Bar-Gill notes the substantial convergence between choice theory and a welfarist view. If he is right, then what does choice theory add?

Our task in Part I of this …

The Common Law Of Contract And The Default Rule Project, Alan Schwartz, Robert E. Scott

Faculty Scholarship

The common law developed over centuries a small set of default rules that courts have used to fill gaps in otherwise incomplete contracts between commercial parties. These rules can be applied almost independently of context: the market damages rule, for example, requires a court only to know the difference between market and contract prices. When parties in various sectors of the economy write sales contracts but leave terms blank, courts fill in the blanks with their own rules. As a consequence, a judicial rule that many parties accept must be "transcontextual": parties in varied commercial contexts accept the courts' rule …

Origin Myths, Contracts, And The Hunt For Pari Passu, Mark C. Weidemaier, Robert E. Scott, G. Mitu Gulati

Faculty Scholarship

Sovereign loans involve complex but largely standardized contracts, and these include some terms that no one understands. Lawyers often account for the existence of these terms through origin myths. Focusing on one contract term, the pari passu clause, this article explores two puzzling aspects of these myths. First, it demonstrates that the myths are inaccurate as to both the clause’s origin and the role of lawyers in contract drafting. Second, the myths often are unflattering, inaccurately portraying lawyers as engaged in little more than rote copying. The article probes this disjunction between the myths and lawyers’ actual practices and explores …

Bankruptcy's Rarity: An Essay On Small Business Bankruptcy In The United States, Edward R. Morrison

Faculty Scholarship

Most nations have enacted statutes governing business liquidation and reorganization. These statutes are the primary focus when policymakers and scholars discuss ways to improve laws governing business failure. This focus is misplaced, at least for distressed small businesses in the United States.

Evidence from a major credit bureau shows that over eighty percent of these businesses liquidate or reorganize without invoking the formal Bankruptcy Code.

The businesses instead invoke procedures derived from the laws of contracts, secured lending, and trusts. These procedures can be cheaper and speedier than a formal bankruptcy filing, but they typically require unanimous consent of senior, …

Embedded Options In The Case Against Compensation In Contract Law, Robert E. Scott, George G. Triantis

Faculty Scholarship

Although compensation is the governing principle in contract law remedies, it has tenuous historical, economic, and empirical support. A promisor's right to breach and pay damages is only a subset of a larger family of termination rights that do not purport to compensate the promisee for losses suffered when the promisor walks away from the contemplated exchange. These termination rights can be characterized as embedded options that serve important risk management functions. We show that sellers often sell insurance to their buyers in the form of these embedded call options, and that termination fees, including damages, are in essence option …

Contracts – Only With Consent, Ronald J. Mann

Faculty Scholarship

My friend and former colleague Omri Ben-Shahar has established a reputation for providing nuanced and well-grounded applications of economic analysis to important problems of contract law. In recent years, he has undertaken the ambitious task of exploring a significant topic at the boundary of contract law: liability for problems that arise out of efforts to form a contract. The essay to which I reply, Contracts Without Consent: Exploring a New Basis for Contractual Liability, is his second work on that topic, following his 2001 article with Lucian Bebchuk entitled Precontractual Reliance. Collectively, these pieces provide a comprehensive analysis …

Self-Enforcing International Agreements And The Limits Of Coercion, Robert E. Scott, Paul B. Stephan

Faculty Scholarship

International law provides an ideal context for studying the effects of freedom from coercion on cooperative behavior. To be sure, almost all academic discussions on the subject begin by asking whether international law constitutes "law." But the category of all "international law" is too big and heterogeneous to permit useful analysis. Whether to regard, say, the rules governing the conduct of war or international humanitarian law as "law" presents radically different issues than analyzing the legal character of the Treaty of Rome (the constitutive instrument of the European Community), or the Warsaw Convention (the instrument governing contracts for the carriage …

(Baby) M Is For The Many Things: Why I Start With Baby M, Carol Sanger

Faculty Scholarship

For several years now I have begun my first-year contracts course with the 1988 New Jersey Supreme Court case In the Matter of Baby M. In this essay, I want to explain why. I offer the explanation in the spirit of modest proselytizing, recognizing that many of us already have a favored method or manner into the course: some introductory questions we pose before leaping into (or over) the introductions already provided by the editors of the many excellent casebooks available. But I have found that Baby M works extremely well in ways that others may want to consider. …

An Economic Analysis Of The Guaranty Contract, Avery W. Katz

Faculty Scholarship

Guaranty arrangements, in which one person stands as surety for a second person's obligation to a third, are ubiquitous in commercial transactions and in commercial law. In recent years, however, scholarly attention to the topic has been scant; and no one has systematically analyzed this body of law and practice from an economic policy perspective. Accordingly, this Article attempts to outline the basic economic logic underlying the guaranty relationship, and applies the results to a variety of specific issues in government policy and private planning. It poses and answers three main questions: First, why would a creditor prefer to make …

Bloomer Girl Revisited Or How To Frame An Unmade Picture, Victor P. Goldberg

Faculty Scholarship

Nearly all contracts casebooks feature the saga of Shirley MacLaine's suit against Twentieth Century Fox arising from the cancellation of the proposed film Bloomer Girl. None really get the story right. To be fair, none try. The case is a vehicle for exploring the obligation of the victim of the breach of an employment contract to take alternative employment. If MacLaine refused an offer of alternative employment that was not "different and inferior," her failure to mitigate would mean that the earnings she would have received would be offset against the damages; so, asked the court, was the alternative …

Minor Changes: Emancipating Children In Modern Times, Carol Sanger, Eleanor Willemsen

Faculty Scholarship

Parents and their teenage children don't always get along. At some time during adolescent development, parents may turn into embarrassments and teenagers into domestic terrorists. For most families this is a phase. Adolescence is endured, the child accomplishes some degree of separation from parents, and the transition to adulthood advances.

In some families, however, the period is more like a siege than a phase. Conflict may last longer and be more strifeful, more intense. If the family is incapable or unwilling to resolve the tensions, an intractability may set in. In these cases, domestic tranquility seems attainable only when the …