CONTRACTS

Contracts



Contracts

A contract is one of the basic social and legal institutions in modern society. A contract frames and coordinates human interactions. It is an agreement that creates, assigns, delegates, and transfers rights and obligations, tangible and intangible goods, services, and entitlements between the contracting parties, relying on their voluntary, rational, and deliberate consent. Today, contractual relationships among persons, communities, organizations, and states emerge as an alternative or at least as an amendatory legal instrument of market coordination and state regulation. A contract binds person to person, person to organization, organization to organization, person to society, person to state, and state to state in private, social, economic, and political affairs.

In the late 20th century, the economic analysis of contracts has gained ascendancy in American academic and judicial discourse. Its impact as a normative theory of contract law, adjudication, and contractual settlement on the European legal systems is quite moderate because the role of the European judges is primarily limited to the interpretation and enforcement of contract in the context of the civil and business code provisions enacted by the legislature. In continental Europe, the judges are bound to apply and enforce the law and have less room to exercise judicial discretion by referring to external economic criteria, uncodified commercial norms, or private orderings. The success of economic analysis ofcontract in the United States attests not only to the country's common-law tradition but also to the pervasiveness of legal pragmatism in jurisprudence.

In a perfect world, where transaction costs are zero; unforeseen contingencies never happen; opportunistic behavior, asymmetric information, and bargaining power disparities are unknown phenomena; and the parties voluntarily and deliberately perform their contractual obligations for the benefit of mutual welfare, legal intervention may be unnecessary. Nevertheless, in our less perfect world all these phenomena and anomalies quite frequently occur when the parties enter into contracts. Economic analysis attempts to provide an alternative theoretical approach to contracts. Law and economics scholars apply economic concepts and theories to the analysis of contracts to settle contractual disputes resulting from incompleteness, nonperformance, impossibility to comply, contract breach, and other damages. Besides offering practical guidance about the economic analysis of contracts in contract formation, contractual settlements, and adjudication, economic analysis also endeavors to provide a solid normative foundation for contract law. The system of contract law—the set of optional and mandatory rules—is tested in accordance with external economic criteria as well. As indicated frequently, the use of external economic criteria in legal arguments and adjudication contradicts the concept of justice and makes the legal system inconsistent and nontransparent, especially when infringements of rights, legal entitlements, and deliberate breaches of contract are at issue. The use of economic criteria in adjudication is external to law. If a judicial decision is based not on the examination and upholding of preexisting contractual rights and obligations but on the measurement of the prospective welfare effects of the enforcement of contract, adjudication becomes uncertain. Law and economics scholars contest this objection, alleging that economic analysis of law does not intend to change the principles of the legal system but rather to explain legal rules and to shed light on efficient ...