1. George Mason School of Law
Contracts I
B. Why Enforce Contracts
F.H. Buckley

2. Walker-Thomas Furniture Store 1074 Seventh St. NW (at L)2

3. Corrective and Distributive Justice
Do you agree with Aristotle that there are two different kinds of justice?

4. Distributive Justice
How would Aristotle allocate goods as a matter of distributive justice?

5. Distributive Justice
Can you imagine a legal system in which the idea of distributive justice is entirely absent?

6. Distributive Justice
How would Aristotle allocate goods as a matter of distributive justice
According to merit--but just what is merit?

7. Distributive Justice
How would Aristotle allocate goods as a matter of distributive justice, according to merit?
Democrats identify merit with the status of freeman, supporters of oligarchy with wealth (or with noble birth), and supporters of aristocracy with excellence.

8. Distributive Justice
Should distributive justice play a role in contact law? In Walker-Thomas?

9. Corrective Justice How would this apply in contract law?
The justice in transactions between man and man is a sort of equality indeed, and the injustice a sort of inequality

10. Corrective Justice How would this apply in contract law?
This kind of injustice being an inequality, the judge tries to equalize it; for in the case also in which one has received and the other has inflicted a wound, or one has slain and the other been slain, the suffering and the action have been unequally distributed; but the judge tries to equalize by means of the penalty, taking away from the gain of the assailant….

11. Corrective Justice How would this apply in contract law?
These names, both loss and gain, have come from voluntary exchange; for to have more than one's own is called gaining, and to have less than one's original share is called losing, e.g. in buying and selling and in all other matters in which the law has left people free to make their own terms; but when they get neither more nor less but just what belongs to themselves, they say that they have their own and that they neither lose nor gain.
Therefore the just is intermediate between a sort of gain and a sort of loss, viz. those which are involuntary; it consists in having an equal amount before and after the transaction.

12. Corrective Justice How would this apply in contract law?
Does this imply that bargains are always zero-sum transactions?

13. Corrective Justice How would this apply in contract law?
Is Williams a proper case for corrective justice?
Can you identify the inequality?

14. If you think it’s just a matter of pulling down a rule
Which one do you pull?
Contracts should be enforceable?
Unconscionability vitiates consent?

15. A presumption of enforceability
Let’s start with the presumption that contracts should be enforceable
And why this is so can be understood from the perspective of law-and-economics

16. Law and Economics: Understand the world through numbers
Can we count up pleasures and pains?

17. By numbers: Jeremy Bentham’s hedonic calculus
The principle of utility is the foundation of the present work: it will be proper therefore at the outset to give an explicit and determinate account of what is meant by it. By the principle of utility is meant that principle which approves or disapproves of every action whatsoever, according to the tendency which it appears to have to augment or diminish the happiness of the party whose interest is in question: or, what is the same thing in other words, to promote or to oppose that happiness. I say of every action whatsoever and therefore not only of every action of a private individual, but of every measure of government.
Principles of Morals and Legislation (1789)

18. By numbers: Jeremy Bentham’s hedonic calculus
The principle of utility: Utilitarianism

19. Jeremy Bentham—really… The “auto-icon”
Founder of
University College,
London

20. Economic Analysis of Contract Law
Economics as an explanation for contract enforcement

21. GDP per capita England

22. The earth’s economic center of gravity
Weighing locations by GDP
and projecting to the earth’s surface

23. Economic Analysis of Contract Law
Economics as an explanation for why we enforce contracts
Economics as an explanation for the contours of contract law
Positive and normative

24. The Law and Economics movement
Henry Manne
Richard Posner

25. Economics as an explanation for contract enforcement
Printing & Numerical v. Sampson
Sir George Jessel, M.R

26. Printing & Numerical v. Sampson
What was the impugned promise and what was the argument that it was against public policy?

27. Printing & Numerical v. Sampson
When, per Jessel, should public policy be invoked to bar enforceability?

28. Printing & Numerical v. Sampson
If there is one thing which more than another public policy requires it is that men of full age and competent understanding shall have the utmost liberty of contracting, and that their contracts when entered into freely and voluntarily shall be held sacred and shall be enforced by Courts of justice.

29. Printing & Numerical v. Sampson
Who benefits in a case such as this from contract enforcement?

30. Printing & Numerical v. Sampson
Who benefits?
A man who is a needy and struggling inventor may well agree either for a present payment in money down, or for an annual payment, to put his intellectual gifts at the service of a purchaser.

31. Promising and Efficiency
The benefit afforded by promissory institutions is a greater assurance of performance
So why is that important?

32. Promising and Efficiency
Let’s assume (for the moment) that contract enforceability has something to do with societal wealth

33. Promising and Efficiency
Let’s also assume (with Bentham) that happiness is a desirable goal

34. Promising and Efficiency
So is societal wealth correlated with happiness?

35. The Happiness Literature
Survey reports of subjective well-being
“Would you say that you are very happy, pretty happy, or not too happy?”

37. The curve isn’t linear…
Diminishing marginal utility
Utility sounds better than “happiness”
Marginal utility is the gain in utility from one more $1
Diminishing marginal utility means that the utility gains from one more $1 get smaller as one gets richer

39. The Happy Zone (upper right)
What else do the countries in the Happy Zone have in common?

40. The Happy Zone (upper right)
What else do the countries in the Happy Zone have in common?
How about political and economic freedom?

42. Heritage Economic Freedom 2014
Hong Kong
90.1
Free 2
Singapore
89.4 3
Australia
82.0 4
Switzerland
81.6 5
New Zealand
81.2 6
Canada
80.2 7
Chile
78.7
Partly Free 8
Mauritius
76.5 9
Ireland
76.2 10
Denmark
76.1 11
Estonia
75.9 12
United States
75.5

44. The Happy Zone (upper right)
What else do the countries in the Happy Zone have in common?
How about the rule of law?

45. What goes into the rule of law?
Corruption?
Stable property rights
Sanctity of contract

47. The Rule of Law
The World Bank estimates that natural and capital assets amount to only 23 percent of a country’s riches.
The rest is intangible assets, the difference in institutions, of which the most important element is adherence to the rule of law: equality before the law, an efficient and honest judicial system and the absence of corruption.
Remarkably, that accounts for 44 percent of a country’s total wealth according to the World Bank.

48. Where does contract law come in?
Sanctity of Contract and the Rule of Law
The Rule of Law makes people wealthier
And Wealth makes people happy

49. Where does contract law come in?
Exploiting bargaining gains through contract enforcement
And how we leave money on the table without contract enforcement

50. Contracting as a solution to the Prisoners’ Dilemma game
A simple game that has become the dominant paradigm for social scientists since it was invented about 1960.
How the game works – and why did not work for Dilbert

51. The paradox of the PD game
While cooperation is collectively rational, defection is individually rational.

52. Hollywood gets in the act
Russell Crowe
as John Nash
in “A Beautiful Mind”

53. The need for poetic license

54. Modeling PD games
Game theoretic problems: payoffs for each player depend on actions of both

55. Modeling PD games
Game theoretic problems: payoffs for each player depend on actions of both
Two possible strategies: A party cooperates when he performs value-increasing promises, and defects when he breaches

56. Modeling Two-party choice
Cooperate
Player 1

57. Modeling Two-party choice
Defect
Player 1

58. Modeling Two-party choice: Player 2
Cooperate

59. Modeling Two-party choice Player 2
Defect

60. Modeling Two-party Choice Both Cooperate
Player 2
Cooperate
Defect
Both cooperate
Player 1

61. Modeling Two-party Choice Both Defect
Player 2
Cooperate
Defect
Both defect
Player 1

62. Modeling Two-party Choice Sucker’s payoff for Player 1
Cooperate
Defect
Player 1 cooperates, Player 2 defects
Player 1

63. Modeling Two-party Choice Player 1’s temptation to defect
Cooperate
Defect
Player 1 defects, Player 2 cooperates
Player 1

64. Bargains as a Prisoner Dilemma game Cooperation: Promise and Perform Defect: Promise and Breach
Player 2
Cooperate
Defect
Joint
cooperation
Player 1: sucker’s payoff
Player 2: Sucker’s payoff
defection
Player 1

65. Plugging in payoffs First number is payoff for Player 1, Second number is payoff for Player 2
Cooperate
Defect
3, 3
-1, 4
4, -1
0, 0
Player 1

66. What should Player 1 do if he knows Player 2 will cooperate?3
Defect 4
Player 1

67. What should Player 1 do if he knows Player 2 will cooperate?3
Defect 4
Player 1
Player 1 gets 3 if he cooperates and 4 if he defects
So he defects…

68. What should Player 1 do if he knows Player 2 will cooperate?3
Defect 4
Player 1 

69. What should Player 1 do if he knows Player 2 will defect?
Cooperate -1
Player 1

70. What should Player 1 do if he knows Player 2 will defect?
Cooperate -1
Player 1 

71. Defection dominates for Player 1
Cooperate
Defect 3 -1 4
Player 1  

72. What should Player 2 do if he knows Player 1 will cooperate?
Defect 3 4

73. What should Player 2 do if he knows Player 1 will cooperate?
Defect 3 4 

74. What should Player 2 do if he knows Player 1 will defect?
Cooperate
Defect -1

75. What should Player 2 do if he knows Player 1 will defect?
Cooperate
Defect -1 

76. Defection dominates for Player 2
Cooperate
Defect 3 4 -1  

77. Defection dominates for both Players
Cooperate
Defect

78. The paradox of the PD game
While cooperation is collectively rational, defection is individually rational.

79. The paradox of the PD game
While cooperation is collectively rational, defection is individually rational.
The undersupply of cooperation is “the tragedy of the commons.” Garrett Hardin, The Tragedy of the Commons (1968).

80. The Tragedy of the Commons and the Law of the Sea)

81. The Tragedy of the Commons: Ranchers (open land) vs farmers (private property)
The Man Who Shot Liberty Valance (1962)

82. Two-party Choice in Contracting
Player 2
Cooperate
Defect
Joint cooperation:
Both perform
Player 1 performs, Player 2 breaches
Player 1 breaches, Player 2 performs
Both defect:
Neither performs
Player 1

83. Joint Cooperation Everyone promises and performs
I’m worried about Tessio
The food is better at the Tattaglias

84. Joint Defection Player 2 Player 1 Cooperate Defect Joint cooperation:
Both perform
Player 1 performs, Player 2 breaches
Player 1 breaches, Player 2 performs
Both defect:
Neither performs
Player 1

85. Joint defection Can these gentlemen be acting efficiently?
In what sense is this joint defection?

86. The Sucker’s Payoff Player 2 Player 1 Cooperate Defect
Joint cooperation:
Both perform
Player 1 performs, Player 2 breaches
Player 1 breaches, Player 2 performs
Both defect:
Neither performs
Player 1

87. The Sucker’s payoff Sucker performs, other party defects
GONERIL Hear me, my lord; What need you five and twenty, ten, or five, To follow in a house where twice so many Have a command to tend you?
REGAN What need one?
KING LEAR O, reason not the need…

88. The Defector’s Payoff Player 2 Player 1 Cooperate Defect
Joint cooperation:
Both perform
Player 1 performs, Player 2 breaches
Player 1 breaches, Player 2 performs
Both defect:
Neither performs
Player 1

89. The Defector’s Payoff Defector breaches, sucker performs
"I can make them voting machines sing Home Sweet Home."
"Don't write anything you can phone.
Don't phone anything you can talk.
Don't talk anything you can whisper.
Don't whisper anything you can smile.
Don't smile anything you can nod.
Don't nod anything you can wink."
Gov. Earl K. Long

90. PD games help to explain why we do dumb things
Over-fish lakes and oceans
Pollute
Arms race

91. PD games help to explain why we do dumb things
Over-fish lakes and oceans
Pollute
Arms race
Fail to exploit bargaining gains

92. The Tragedy of the Commons
What’s the solution in promising?

93. What if contracts are prohibited?

94. What if contracts are prohibited?
Marriage is more
than a contract;
it’s a covenant…
Rembrandt, The Jewish Bride 1666

95. What if contracts are prohibited?
But it’s less
than a contract
if the parties have
unilateral
exit rights under
no-fault
divorce laws
Rembrandt, The Jewish Bride 1666

96. Marriage, Divorce, Natality
What did no-fault divorce do to the cost of matrimonial fault?

97. Marriage, Divorce, Natality
What did no-fault divorce do to the cost of matrimonial fault?
Under fault, the straying party pays if he wants a divorce—or if his spouse seeks one
So fault is costly in a fault regime

98. Marriage, Divorce, Natality
How would you expect the parties to react to the increased probability of divorce?

99. Marriage, Divorce, Natality
How would you expect the parties to react to the increased probability of divorce?
Fewer marriages

100. Marriage, Divorce, Natality
How would you expect the parties to react to the increased probability of divorce?
Fewer marriages
Increased female participation in the labor force

101. Marriage, Divorce, Natality
How would you expect the parties to react to the increased probability of divorce?
Fewer marriages
Increased female participation in the labor force
And what about kids?

102. Children as marriage-specific assets
Divorce rate ———
Natality rate for married couples ———

103. Marriage, Divorce, Natality
Bring and Buckley, 18 Int. Rev. Law & Econ. 325 (1998)
Subsidize something (or reduce costs) and you get more of it

104. Contractarianism
What might constrain the parties from entering into a bargain?

105. Contractarianism
What might constrain the parties from entering into a bargain?
Illegal Contracts
Article 9 barriers to security interests in consumer goods
Waivers of divorce rights

106. Contractarianism
What might constrain the parties from entering into a bargain?
Transaction Costs

107. Contractarianism
The Coase Theorem: Parties will enter a binding contract to exploit all bargaining games unless prevented from doing so by transaction costs
Ronald Coase

108. So what are transaction costs?
Give examples of things that get in the way of bargaining

109. So what are transaction costs?
Too many parties. Eg, pollution

110. So what are transaction costs?
Emergencies: No time to bargain

111. So what are transaction costs?
Information processing problems

112. War as a Coasian Problem: Why no peace treaty?
Uccello, Battle of San Romano

113. War as a Bargaining Problem
The Absence of a Bargaining Space
President Bashar al-Assad (and family?) in Vogue

114. War as a Bargaining Problem
Too many parties?

115. War as a Bargaining Problem Informational Problems
So you’re telling me there’s something wrong with attacking uphill and across a river?
Ambrose Burnside
December 1862

116. War as a Bargaining Problem Agent Misbehavior
What was Sir Charles
Napier’s explanation for
his capture of Sindh
in 1843?

117. War as a Bargaining Problem
Agent Misbehavior
Peccavi.

118. Give Contracts a Chance
All we are saying is …
Give Contracts a Chance
Iranians employing
the defect strategy

119. Is there no cooperation without binding contracts?

120. Cooperation without Law?
Voting as an economic puzzle

121. Cooperation without Law?
Voting
No littering

122. Cooperation without Law?
It’s There are two plans for an online dictionary. One is Encarta, promoted by Microsoft, which hires editors. The other relies on individuals to submit entries for free…