Tuesday, April 17, 2007

Oman on Contract Theory

Posted by Jeff Lipshaw

Oman947 Nate Oman (William & Mary, left) has an interesting new article (The Failure of Economic Interpretations of the Law of Contract Damages) out on the reconciliation of efficiency (i.e. law and economics) and autonomy (i.e. the moral consequence of promising) as a basis for a coherent internal interpretive theory of contract law - why does the doctrine say what it says?

Nate demonstrates that the bilateral nature of private contract remedies (i.e. the parties sue each other, rather than having some state apparatus remedy the situation) creates an unresolvable paradox for economic justifications.  The problem is that the expectation remedy is thought to create inefficient over-reliance by the promisor, but the remedy best suited to making sure the promisee does not over-rely - restitution - creates inefficient incentives for the promisor to breach.  If the state were an intermediary, "fining" the promisor to the extent of expectation damages, but rewarding the promisee only to the extent of restitution, there would be (in the perfect world of economists) the optimum efficient.  But the bilateral nature of the remedy means that the system - which only rewards and punishes in a single amount between the parties - cannot be wholly efficient.

I think Nate is a wonderful communicator of contract theory (not to mention Anglo-American legal history), and this is a nice read.  I also admire his doggedness in pursuing the internal reconciliation of the justification of contract law as it exists.  Understand what that means:  by Nate's own analogy (chess), he is going to stay inside the game to provide a coherent explanation for why the game's rules are what they are. 

Patrick O'Donnell, commenting over at Concurring Opinions, asked Nate to juxtapose my recent take on the futility of the effort to justify contract law with Nate's piece.  I can't resist offering up my own take.  To some extent, Nate and I are ships passing in the night.  I am less concerned about trying to create a coherent internal explanation.  Indeed, my point is that a wholly complete and consistent model is not possible under any system of axioms and logical rules (which, as a mathematical model, economics is).  So it is hardly surprising to me that Nate's conclusion is hybrid (as was Jody Kraus's).  Both moral theory and efficiency seem to play a role in different aspects of contract law.  My piece is expressly "meta" in trying to come to terms with why.  Or to put it more cynically (or hopefully, depending on your perspective), I am going to try to explain the relationship of the internal view to the external perspective - the one taken by law and society types, legal realists, critical theorists, and moral philosophers.  Not surprising I get all twisted up (in a fun sort of way) in the question whether the participants in a contract dispute are on inside looking out (as involved first parties), or on the outside looking in (as objective third parties), or if at some point they move from one to the other.

For the last couple weeks, I have been teaching UCC Article 2 remedies, and the dominant theme (in some respects a revelation to me) is the conflict we often find between a literal or mechanical application of the remedy formulas and our intuitive notion of the correct result.  Within the Code, the problem shows up as a conflict between a remedy in the 2-700 series of statutes and Revised 1-305 that says the purpose of the remedy is to put the aggrieved party in as good a position as he or she would have been had the breaching party performed.  But I'm willing to posit, as a metaphor or analogy (here, not in my class, or the students' eyes would be spinning like pinwheels), that it's not just a matter of reconciliation within the system, but the problem that the system (here, legal axioms and rules of inference) will contain true but unprovable propositions - like "the literal application of Section 2-708(1) in X circumstance will overcompensate the aggrieved party."

Nate's abstract is below the fold. Highly recommended! Download it while it's hot!  (Sue me, Solum.)

Here is the abstract:

The law of contracts is complex but remarkably stable. What we lack is a widely accepted interpretation of that law as embodying a coherent set of normative choices. Some scholars have suggested that either economic efficiency or personal autonomy provide unifying principles of contract law. These two approaches, however, seem incommensurable, which suggests that we must reject at least one of them in order to have a coherent theory. This article dissents from this view and has a simple thesis: Economic accounts of the current doctrine governing contract damages have failed, but efficiency arguments remain key to any adequate theory of contract law. Contractual liability - like virtually all civil liability - is structured around the concept of bilateralism, meaning that damages are always paid by defeated defendants to victorious plaintiffs. Ultimately, economic accounts of this basic feature are unpersuasive. This criticism, however, leaves untouched many of the key economic insights into the doctrine of contract damages. The limited failure of economic interpretations points toward a principled accommodation of both autonomy and efficiency in a single vision of contract law where notions of autonomy provide the basic structure and economics fills in most of the doctrinal detail.


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Regarding your comment that 'a wholly complete and consistent model is not possible under any system of axioms and logical rules (which, as a mathematical model, economics is),' is both true and false: true, insofar as the idea that every such model or system will, in the end, or at bottom, contain foundational principles or axioms that cannot find justification without pain of infinite regress; false, in as much we might still view such a system as 'complete' and 'consistent,' given this structural truth. In other words, the inability to provide justified axiomatic principles rather than necessary assumptions or presuppositions is not a liability or debilitating to the enterprise of being 'systematic' and 'coherent,' it is simply a logical (hence necessary) constraint. As Nicholas Rescher has written, 'The fact is that philosophy cannot provide a rational explanation for *everything*, rationalizing all of its claims "all the way down." Sooner or later the process of explanation and rationalization must--to all appearances--come to a halt in the acceptance of unexplained explainers.' This fact plays itself out in 'two very different modes of writing philosophy. The one pivots on inferential expressions such as "because," "since," "therefore," "has the consequence that," "and so cannot," "most accordingly," and the like. The other bristles with adjectives of approbation or derogation" evident," "sensible," "untenable," "absurd," "inappropriate," "unscientific," and comparable adverbs like "evidently," "obviously," "foolishly," etc. The former relies primarily on inference and argumentation to substantiate its claims, the latter primarily on the rhetoric of persuasion. The one seeks to secure the reader’s (or auditor’s) assent by reasons, the other by an appeal to values and appraisals—and above all by an appeal to fittingness and consonance within the overall scheme of things. The one looks foundationally toward secure certainties, the other coherentially towards systemic fit with infirm but nevertheless respectable plausibilities. Like inferential reasoning, rhetoric too is a venture of justificatory systematization, albeit one of a rather different kind.' Let us christen the first mode of exposition 'agonistic,' the agonistic and rhetorical modes of philosophical exposition being ideal types. A vast majority of modern philosophers use the agonistic form of exposition, while Schopenhauer, Kierkegaard, Nietzsche, Unamuno, Ortega y Gasset, and (sometimes) Sartre stand out for their reliance on the rhetorical (or ‘axiological’) mode of exposition. Of course as Rescher makes clear, no philosopher fully exemplifies an ideal type of exposition, and some, like Wittgenstein, used one then the other form of exposition over the course of their philosophical careers (Sartre’s Being and Nothingness irritated philosophers simply because he shifted abruptly back and forth between agonistic and rhetorical exposition). Furthermore, Rescher yokes these two types of exposition to distinctly different objectives: 'The demonstrative/argumentative (inferential) mode is efficient for securing a reader’s assent to certain claims, to influencing one’s beliefs. The rhetorical (evocative) mode is optimal for inducing a reader to adopt certain preferences, to shaping or influencing one’s priorities and evaluations.' Finally, Rescher concludes that no philosopher can avoid the method and mode of the type she 'affect[s] to reject and despise.' I think one can draw analogical comparisons and lessons with respect to your argument from this without resorting to the 'insider' and 'outsider' metaphor. All conceptual frameworks are just that, and every system of such will be grounded (unavoidably yet legitimately) in certain internally unquestionable assumptions and based on a set of categories or concepts that are seen as perfectly appropriate or suited to an enterprise which aims for systematicity and coherence. These terms are often if not necessarily indeterminate, fluid, and open-ended. Our basic concepts are ineluctably but not fatally (in the sense that they do not undermine objectivity) 'theory-laden.' This allows for competing and alternative conceptual frameworks (e.g. neo-classical economics and moral theory) to be relatively (therefore not absolutely) true. (This need not mean 'anything goes.')

Posted by: Patrick S. O'Donnell | Apr 17, 2007 8:43:16 AM

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