Document Type

Working Paper

Publication Date

2021

Center/Program

Center for Law and Economic Studies

Abstract

Contract law has long suffered from an institutional problem: What legal institution can best create an efficient law for commercial contracts? Until the early 20th century, the vast majority of contract law was created by common law courts. The common law created contract default rules that possessed three key properties: They solved contracting problems (i) that parties in very diverse contexts faced, (ii) as the parties would have solved them had they contracted about the matter, and (iii) the defaults were updated as commerce changed. But common law courts are slow: Default rules require years to take form. In response, the 20th century saw public and private lawmaking bodies enact commercial statutes to update discrete legal areas such as secured credit, commercial paper and bankruptcy. The private lawmaking efforts were propelled initially by the need to address specialized fields where more rapid updating was needed, but any revisions to these statutes were controlled by cohesive interest groups whose actions only serve their private interests. These private lawmaking efforts also assumed a generalist portfolio. In the Uniform Commercial Code, they reached beyond specialized fields to the law of sales and then, in the Restatements, to all contracting behavior. These generalist bodies also had a serious flaw. Even if their rules were efficient when created, the rules did not change with changing commercial practice. We show that such “obsolescence” – the persistence of rules that only solve yesterday’s contracting problems – a) is common in the efforts of the generalist private lawmaker, b) is hard to avoid, and c) induces socially inefficient contractual responses. This leaves a set of unsatisfactory institutional choices for producing a general law of commercial contracts: Specialized fields are subject to interest group capture and intrinsic flaws prevent generalist lawmaking bodies from updating their rules as commerce changes; courts may be slow, but no other institution has done better in combatting the obsolescence concern.

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