Law in Contemporary Society

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EfficientBreachTheory 6 - 27 Jan 2012 - Main.RohanGrey
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The following is an edited transcript of a Facebook conversation between Joseph Itkis (JI), Jonathan Brice (JB), Shaked Sivan (SS) and myself, Rohan Grey (RG) that was inspired by our class yesterday and we thought might be worth sharing. Apologies in advance for any edit-fails.
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 Here is a “refactored” version of the above dialogue, written in a summative prose style with the explicit attributions to individuals removed for the sake of conceptual clarity. Given I was a participant in the conversation, there is a possibility of bias in my interpretation, although I have attempted in good faith not to present misleading or caricatured representations of the positions held by other participants. Luckily, since we included the original 5000-word transcript above in addition to this summary (at the hopefully forgivable additional cost to the website server of maybe 100kB of data), interested readers still have the ability to make their own decision as to whether I’m fairly representational in my interpretation of the positions by others.
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<		I’m two-thirds of the way through, at about 600 words, although the last question is perhaps the meatiest, so we’ll see if I get it out in 900 on first draft.
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>		I’m at about 1080 words. will edit down to 900.
 The discussion above centered around three normative questions:
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 The first major point of disagreement was whether the aim of legal arbitration should be to promote the actual performance of commitments, where feasible, or merely to determine an appropriate form of compensation to a party that suffers a loss due to another party’s non-performance, irrespective of whether that performance was intentional or unintentional. This disagreement ultimately turned around whether or not courts should accord any implicit value to the integrity of a contract.
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<		This question was determined to be a normative one. Holmes’s “bad man” approach is only useful in inferring the positive qualities of a particular court or jurist’s judicial approach rather than the its relative merit. There was general agreement that most self-styled “efficient breach” theorists such as Galabresi and Posner advocated the latter approach, while Eben appeared in class to be suggesting that the former interpretation may be preferable.
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>		This question was determined to be a normative one, since Holmes’s “bad man” approach was useful in ascertaining the positive qualities of a particular court or jurist’s judicial approach rather than the its relative merit. There was general agreement that most self-styled “efficient breach” theorists such as Galabresi and Posner advocated the latter approach, while Eben appeared in class to be suggesting that the former interpretation may be preferable.
 
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<		In order to answer this question, the discussion then turned to the question of what the appropriate framework for analysis was – in particular, whether or not the law should adopt a purely economic (i.e. utilitarian/consequentialist) perspective in determining the optimal form of legal remedy. There was disagreement between those who saw Eben as advocating that courts acknowledge and consider the external deontological value implicit in social trust, and those who saw him as accepting the fundamental consequentialist approach but making a more nuanced economic argument regarding the negative externalities associated with efficient breach theory. Ultimately the question was left unanswered, although the discussion of the original question proceeded upon the assumption of the latter approach.
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>		In order to answer this question, the discussion then turned to the question of what the appropriate framework for analysis was – in particular, whether or not the law should adopt a purely economic (i.e. utilitarian/consequentialist) perspective in determining the optimal form of legal remedy. There was disagreement between those who saw Eben as advocating that courts acknowledge and consider the external deontological value implicit in social trust, and those who saw him as adopting a consequentialist approach but making a more nuanced economic argument regarding the negative externalities associated with efficient breach theory. Ultimately the question was left unanswered, although the discussion of the original question proceeded upon the assumption of the latter approach.
 
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<		It was also suggested that the claimed distinction between the two perspectives was illusory, given that the rule of law (including its protection of so-called natural “rights”) derives social legitimacy on the grounds that it purports to promote aggregate social utility, which is indistinguishable from a “perfect” economic outcome, although others disagreed and argued that under the former view Eben was attaching additional moral considerations to social trust beyond its instrumental value in promoting social utility. Those who held the latter view argued that contract law was qualitatively different to criminal law, which incorporated moral as well as economic claims, although they acknowledged that even in criminal law economic analysis is often employed. However, others disagreed that there is any qualitative distinction, pointing to the diamond industry as an example of imposing a criminal punishment-like sanction on violation of contract law due to a collective belief in the increased aggregate utility of preventing certain forms of conduct than allowing them when an individual actor deems them maximize personal utility over the cost of paying compensatory damages.
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>		It was also suggested by some that the claimed distinction between the two perspectives was illusory, given that the rule of law (including its protection of so-called natural “rights”) derives social legitimacy on the grounds that it purports to promote aggregate social utility, which is indistinguishable from a “perfect” economic outcome. They went on to argue that it was an implicitly moral decision whether to adopt a system that attempts to protect parties from intentional breach by other contractually bound parties, or one that encourages breach when a contractually bound party deems it to maximize personal utility over the cost of paying compensatory damages to the party that directly suffers from the breach. Others disagreed and argued that Eben was attaching additional moral considerations to social trust beyond its instrumental value in promoting social utility. They argued that contract law was qualitatively different to criminal law, which incorporated moral rights claims as well as economic claims, although they acknowledged that even in criminal law economic analysis is often employed, and that the creation of a legal contract could potentially be viewed as the creation of a legal “right” of one party to force performance by the other.
 
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<		The final question discussed regarded how courts should conduct utility-maximization analysis – specifically, whether or not they should consider intentional breach a negative externality that warranted a Pigovian sanction in the interests of promoting aggregate utility.
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>		The third issue we discussed was how courts should conduct utility-maximization analysis – specifically, whether or not they should consider intentional breach a negative externality that warranted a Pigovian sanction in the interests of promoting aggregate utility. At the outset there was significant disagreement whether or not there was in fact a non-trivial benefit gained to businesses from greater trust in the likelihood of legal enforcement of contractual promises. It was generally agreed that social custom affected a firm’s decision whether or not to conduct an efficient breach, and consequently that an efficient breach theory of contract law did not necessarily lead to the complete disregarding of contractual obligation whenever it became profitable to do so. However, this acknowledgment did nothing to address the question of whether a level of trust beyond that maintained through social custom was valuable and warranted legal protect through internalization in efficient breach analysis.

Moreover, it was suggested that private actors already internalized the cost of loss of reputation and social trust into their efficient breach analysis, and hence the externality was already accounted for. However, this claim suffered a fallacy of composition, in that it ignored the potential difference between the sum of individual costs of breach to each actor in each dispute, and the aggregate cost of loss of trust on the efficiency of contract law itself.

Alternatively, it was suggested that the example of the diamond industry indicated that external sanctions were unnecessary since industry would effectively self-regulate, however it was pointed out in response that the practice of putting individuals to death for violating handshakes was in fact an imposed penalty determined collectively by all relevant actors and applied uniformly to all handshakes in the industry, rather than through a case-by-case determination, and hence was indistinguishable from a general socially imposed legal sanction on intentional breach of contract.

There was general agreement that social institutions, including legal systems, have the capacity to shape broader social values, however some expressed skepticism that contractual enforcement would be particularly effective in generating genuine trust between individuals. Even if this was true, however, there was general agreement that there would still be tangible effects on the level of contractual enforcement, and an acknowledgment that these effects could themselves in turn inspire greater levels of social trust.

Furthermore, it was suggested that a punitive model would potentially reduce the number of contracts entered into, although it was also acknowledged that greater trust in contractual enforcement could increase the strength of contracts as well as provisions to account for a greater range of contingent outcomes, through exceptions, liquidated damages provisions and the like.

Finally, it was acknowledged that a quantifiable calculation of aggregate social cost would be extremely difficult. However, it was also pointed out that courts currently enjoy a wide latitude in determining incidental and expectational loss, suggesting that an analogous process of quantification is already undertaken by the courts.

 

-- RohanGrey - 25 Jan 2012 \ No newline at end of file


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