Center for Contract and Economic Organization
Program in the Law and Economics of Capital Markets
The common law developed over centuries a small set of default rules that courts have used to fill gaps in otherwise incomplete contracts between commercial parties. These rules can be applied almost independently of context: the market damages rule, for example, requires a court only to know the difference between market and contract prices. When parties in various sectors of the economy write sales contracts but leave terms blank, courts fill in the blanks with their own rules. As a consequence, a judicial rule that many parties accept must be “transcontextual”: parties in varied commercial contexts accept the courts’ rule by writing contracts that contain just the gap the rule could fill. A long-standing project of academics and lawyers attempts to supplement common law contract rules with substantive default rules and default standards. This project has produced Article 2 of the UCC and the Second Restatement of Contracts and the project plans to produce more privately created contract law. We show that the “default rule project” could not create substantive default rules because the contract terms for which the rules would substitute commonly are context dependent: the terms’ content either is a function of particular parties’ circumstances or a particular trade’s circumstances. Members of the default rule project, whom we call “drafters,” could not access the information needed to create the efficient rules that require such local knowledge. Instead, the drafters supplied commercial parties with default standards that courts can apply transcontextually in addition to or as replacements for the common law rules. Contracts sometimes do contain standards, but only when the standards are accompanied by substantive terms from which courts can infer the parties contracting goals and thus apply the standards to advance them. The drafters’ decision to adopt unmoored standards was a mistake because commercial parties do not accept, and thus contract out of, the statutory and restatement default standards. In contrast, the common law’s transcontextual default rules continue to stand. Our analysis here explains the default rule project’s past failures and their current consequences: the article thus illuminates the contract law we have even as it cautions that the default rule project must materially change else it risk repeating past errors.
Alan Schwartz & Robert E. Scott,
The Common Law of Contract and the Default Rule Project,
Virginia Law Review, Forthcoming; Yale Law & Economics Research Paper No. 533
Available at: https://scholarship.law.columbia.edu/faculty_scholarship/1951