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Valparaiso Univ. Law School

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Wednesday, May 28, 2014

Is Economics Dangerous?

                                                                                                 2008-08-19_Flat_tire

 

Although the case is a bit old at this point, it is still one I assign to my law and economics students when we cover contracts. The case,  Specialty Tires of American, Inc. v. The CIT Group/Equipment Financing, Inc., 82 F. Supp. 2d 434 (2000), involves the sale of tire presses which the seller is unable to deliver. The defense is based on a theory of impracticability. So far, so good and the outcome may be the appropriate one. Nevertheless, it appears that the judge may had a course in economics at some point, hopefully not my own. In justifying the decision he reasons:  

"[J]udicial discharge of CIT's [the seller] promise under these circumstances leaves Specialty [the buyer] in no worse a position than it would have occupied without the contract; either way, it would not have these presses, and it has only been able to locate and purchase three similar used presses on the open market since CIT's failure to deliver. On the other hand, CIT is relieved of the obligation to pay damages. Accordingly, excuse for impracticability would appear to be a Pareto-optimal move . . .increasing CIT's welfare while not harming Specialty. This too is a valid policy reason for imposing the risk of loss on Specialty. SeeCalamari & Perillo, supra § 13.1, at 496. Thus, economic analysis confirms as sound policy the result suggested by the caselaw. . . . "

Putting aside that there are no Pareto Optimal moves -- optimality is a state, "superior" and "inferior" are "moves" --  how is it that a contracting party in possession of the promise of another party is not worse off if that promise is excused? I am not sure how the logic of the decision could be contained. Every time one party wants out of a contract, there  is the potential for that party to be better off  and for the other party to be in the position he or she was in before making the contract.  But that is  hardly the question.

More to come on the dangers of Paretian standards in contract law. 

 

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