Volume 33, Number 3


ON THE RATIONALE FOR PENALTY DEFAULT RULES

Eric Maskin

The legal literature on default rules studies which fall-back provisions the law does or should prescribe if a contract fails to specify parties’ obligations fully in some contingency that arises. The “does” question is an empirical matter about which I have nothing to say. I will instead concentrate on the “should” question, specifically, on whether there is a theoretical rationale for so-called penalty default rules.
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YA-HUH: THERE ARE AND SHOULD BE PENALTY DEFAULTS

Ian Ayres

In two separate articles, Eric Maskin and Eric Posner attack the positive and normative bases of penalty defaults. Posner claims that there are no penalty defaults in contract law, and Maskin seems to claim that penalty defaults are not efficient.
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QUANTIFYING FORESEEABILITY

Oren Bar-Gill

This Article extends the law-and-economics literature on the foreseeability doctrine and on contract default rules more generally. It derives (numerically) the optimal default cap on contractual damages in a model with a continuum of buyer types and perfect competition among sellers. When communication costs are low, the optimal cap is significantly higher than the damages incurred by the average buyer. A better performance technology reduces the optimal damages cap. Greater homogeneity among buyers increases the optimal cap. The Article identifies conditions under which an optimally defined foreseeability threshold significantly increases welfare. It also explores the normative implications of the doctrinal preclusion of a zero-damages default.
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ON THE STICKINESS OF DEFAULT RULES

Omri Ben-Shahar; John A. E. Pottow

It was once perceived, and still is commonly taught, that default rules in contract law must mimic efficient arrangements. Otherwise, these rules impose needless transaction costs upon parties who seek to opt out of them to reach more efficient positions. In settings where these costs are high, parties might find themselves “stuck” in a default, unable to reach the outcome that they prefer.
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DEFAULT RULES, PENALTY DEFAULT RULES, AND NEW FORMALISM

Curtis Bridgeman

The theme of this Symposium has been default rules, and much of the focus has naturally been on contract law. The elephant in the room that has gone almost without mention is new formalism. The new formalists in contract law, who are best represented by Alan Schwartz and Robert Scott, argue that despite the conventional wisdom, there are in fact very few default rules in contract law. What typically pass for default rules are, for the most part, vague standards that do more harm than good. Moreover, they argue that the very idea of a universal set of default rules that would govern most contract situations is in principle a quixotic quest and in practice even worse due to institutional incompetence and the influence of interest groups. Since much of the scholarship in contract law over the last few decades—including some of the contributions to this Symposium—has centered on the quest for better default rules, if they are right, the very value of that work is in serious question. A symposium on default rules at this juncture would be incomplete if it did not mention this important charge. As it turns out, Eric Posner’s intriguing article on penalty default rules inadvertently sets the stage for such a discussion.
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WHAT DEFAULT RULES TEACH US ABOUT CORPORATIONS; WHAT UNDERSTANDING CORPORATIONS TEACHES US ABOUT DEFAULT RULES

Tamar Frankel

This Article addresses corporate law’s default rules, which allow corporations to waive their directors’ liability for damages based on a breach of their fiduciary duty of care. Most large publicly held corporations have adopted such a waiver in their articles of association. This Article suggests that courts should limit the range of the waivers to the circumstances that existed when the voters voted and to the information they received before they voted. This Article distinguishes between public contracts (legislation) and private contracts (commercial transactions) and the default rules that apply to each. The Article shows that courts view corporations and corporate articles as public contracts, but unlike default rules applicable to some public contracts, courts do not limit the scope of the waivers to the information that the voting shareholders received before they voted for the waivers. This Article suggests that courts should.
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INCOMPLETE CONTRACTS IN A COMPLETE CONTRACT WORLD

Scott Baker; Kimberly D. Krawiec

Paradoxically, contracts are both never complete and always complete. 1 Contracts are never fully complete, because some contractual incompleteness is inevitable, given the costs of thinking about, bargaining over, and drafting for future contingencies. In addition, contracting parties may sometimes leave contracts incomplete on purpose, either because one or both of the parties withhold information necessary to complete the contract, or because the parties have determined to “agree to agree later.”
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VERTICAL INTEGRATION, RELATIONAL CONTRACTS, AND SPECIALIZED INVESTMENT: A RESPONSE TO BAKER AND KRAWIEC

Barbara Ann Banoff

Long-term relational contracts are widely recognized as posing special problems for contract law. Such contracts are frequently incomplete in some sense. Of course, short-term contracts may also be incomplete, and courts and legislatures have developed various tools for filling gaps and resolving ambiguities in such contracts, but those tools may not be well suited to long-term contracts.
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PENALTY DEFAULTS IN FAMILY LAW: THE CASE OF CHILD CUSTODY

Margaret F. Brinig

In an earlier piece, I suggested that the ALI proposals on domestic partnerships, by assuming cohabitation and marriage were similar, but only for the limited purpose of dissolution, had created a default rule that few would want. Unprotected parties who would marry if they chose (for whom the chapter was presumably intended) would not get enough relief because there would be no protection upon the death of one of them or a requirement of mutual support during the relationship. Parties who did NOT want to get married but wanted to cohabit would find themselves with a set of responsibilities upon dissolution that they did not want to assume (for if they had, they would have married).
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TOWARD A POLITICAL THEORY OF CONSTITUTIONAL DEFAULT RULES

John Ferejohn; Barry Friedman

The question we explore here is whether “default rule thinking” can enlighten the theory or practice of constitutional law. Such thinking is prevalent in private law scholarship, particularly that regarding contractual relations. There, numerous commentators have explored the notion that some legal rules are not absolute restrictions on what parties may do, but may be set aside by them (or “contracted around”) in certain circumstances. Our intention here is to provide a first cut at seeing constitutional law through this distinctive lens. As is the case with all such first cuts, we are certain there are many places for elaboration and improvement on what we have done.
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INFORMATION-FORCING ENVIRONMENTAL REGULATION

Bradley C. Karkkainen

Environmental regulation in the United States has shifted substantially in recent years from near-exclusive reliance on direct regulatory prescription of mandatory rules of behavior to the use of a varied basket of more flexible regulatory strategies. In some of these new arrangements, regulatory rules operate not as mandatory rules of behavior but as default rules that apply if, and only if, the regulated party fails to make satisfactory alternative arrangements. This Article examines a specialized class of default rules—“regulatory penalty defaults”—that exhibit unique “information-forcing” and disciplining characteristics. The Article argues that such rules may prove especially useful in designing a new generation of environmental measures that are more flexible than conventional command style rules, but do not sacrifice regulatory accountability.
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ANOTHER VIEW OF THE QUAGMIRE: UNCONSTITUTIONAL CONDITIONS AND CONTRACT THEORY

Daniel A. Farber

The title of this Article derives from one of the best-known articles in law and economics. In 1972, Guido Calabresi and A. Douglas Melamed published a paper entitled, Property Rules, Liability Rules, and Inalienability: One View of the Cathedral. The subtitle was a reference to a series of paintings by Monet showing the same cathedral in a variety of lighting and weather conditions. The title’s implication was that the article was offering only one among many possible perspectives. In a similar way, this Article is meant to provide an alternative perspective on a well-known scene. The scene in question involves a recondite area of legal
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CONTRACTING AWAY RIGHTS: A COMMENT ON DANIEL FARBER’S “ANOTHER VIEW OF THE QUAGMIRE”

Steven G. Gey

Daniel Farber’s contribution to this Symposium suggests that some aspects of constitutional jurisprudence can be best understood by treating constitutional rights as default rules. Specifically, he attempts to use the concept of default rules to clarify the hopelessly confused doctrine of unconstitutional conditions. Professor Farber’s starting point is incontestable. Virtually everyone agrees that the unconstitutional conditions doctrine is a mess. To borrow Farber’s description, the doctrine is a quagmire: there is no generally accepted explanation for how the doctrine is supposed to work, what limits exist on the application of the doctrine, or even what purpose it is supposed to serve. Various prominent academic commentators have offered different suggestions to clarify these issues, but these commentaries explain the doctrine in very different ways and tend to propose different (and even inconsistent) solutions to reconcile the problems posed by the doctrine.
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