Business Organizations Law | Contracts | Law | Law and Economics
Center for Contract and Economic Organization
The purpose of this Article is to examine the doctrine of promissory estoppel, as it applies in the context of preliminary negotiations, from the viewpoint of the economic theory of rational choice. This is part of a larger project that attempts to understand better the regulatory role of contract formation law generally. From a regulatory vantage point, estoppel and related legal doctrines operate as economic regulations; they shape the bargaining process by influencing the negotiators' incentives to make and to rely on preliminary communications. As with all economic regulations, however, some rules do better than others at promoting efficient exchange, and lawmakers interested in maximizing social wealth must take this into account.
Because the regulatory perspective differs in important respects from more traditional approaches to the subject, some general remarks are necessary to set the stage. As I have argued elsewhere, the traditional literature on offer and acceptance has taken the primary functional justification for legal doctrine in the area to be coordination. In this traditional view, contract formation rules are primarily social conventions that serve to help contracting parties coordinate their agreements, by ensuring that the parties attach the same meaning to their objective manifestations and that their meaning will be understood by third parties called upon to enforce the agreement. This is what Lon Fuller called the "channeling function" of legal formalities.
Courts and commentators who view contract formation law primarily as a coordination device will spend most of their time on what I have elsewhere called "convention maintenance." By this I mean activities such as describing and promulgating the prevailing conventions; protecting the reliance investments of those who operate according to them; providing newcomers with incentives to learn them; and assisting everyone in applying them in ambiguous and novel situations – all for the sake of averting misunderstandings. The enterprise is primarily an interpretive one: Lawyers are directed to search for the parties' reasonable or customary expectations, given the factual circumstances of the case at hand, in order to determine what inferences the parties are justified in making about each other's intentions. As an illustration, consider the common law doctrine that, absent special circumstances, an offeree's silence in the face of an offer will not constitute assent. The usual explanation for this rule is based on conventional understanding: Ordinarily, silence does not warrant an inference of consent, since there are too many other reasons to remain silent.
Within this perspective, which I will call the "coordination" or "interpretive" approach, legal analysis proceeds from the bottom up. Because the proper conventions are taken as established and as embodied in the parties' ordinary expectations, lawmaking authority is decentralized; it flows from the parties and the community from which they come to lawyers and judicial officials. Such an arrangement makes sense if parties' expectations are largely independent of legal practices – for instance, if expectations are based on social custom and are enforced by nonlegal sanctions such as reputation that the parties regard as more important than what the courts can do to them. If so, law must defer to the larger society if private individuals are not constantly to be disappointed in their endeavors. Such an approach will be familiar to students of Article 2 of the Uniform Commercial Code (UCC), which defers throughout to commercial practice and usage.
Avery W. Katz,
When Should an Offer Stick? The Economics of Promissory Estoppel in Preliminary Negotiations,
Yale L. J.
Available at: https://scholarship.law.columbia.edu/faculty_scholarship/266