Document Type

Working Paper

Publication Date

2021

Disciplines

Contracts | Courts | Law | Law and Economics | Public Law and Legal Theory

Center/Program

Center for Law and Economic Studies

Abstract

Contract law has long suffered from an institutional problem: Which legal institution can best create an efficient law for commercial contracts that can overcome "obsolescence” – the persistence of rules that only solve yesterday’s contracting problems? Until the early 20th century, contract law was largely created by common law courts. The law's default rules were efficient when created and courts updated them as commerce changed. But there were few rules and the common law process is slow. In response, the 20th century saw public and private lawmaking bodies enact commercial statutes in discrete legal areas such as secured credit, commercial paper and bankruptcy. Cohesive interest groups rapidly updated these discrete rules, but the rules, both originally and as changed, served only the interests of the creating groups. 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. But these generalist bodies lack the institutional capacity to update, so many of their rules have not changed with changing commercial practice. Obsolescence is not innocuous: it can induce inefficient contracting practices and encourage parties to behave strategically. The need for a modern general law of commercial contracts remains. Specialized lawmakers are subject to interest group capture and the generalist lawmaking bodies cannot update. Courts have responded better to the obsolescence concern, but they are slow and limited. Hence we suggest a public/private regulatory response to the vexing production problem in contract law.

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