George Mason School of Law

1. George Mason School of Law Contracts II MW 1000 – 1115 Hazel 121 F.H. Buckley fbuckley@gmu.edu

2. George Mason School of Law • Why Enforce Contracts

3. George Mason School of Law • Why Enforce Contracts • Where Contracts Should Not Be Enforced

4. George Mason School of Law • Why Enforce Contracts • Where Contracts Should Not Be Enforced • The Content of the Contract • Conditions • Promissory and Non-promissory • Warranties

5. George Mason School of Law • Why Enforce Contracts • Where Contracts Should Not Be Enforced • The Content of the Contract • Breach and Remedies for Breach

6. George Mason School of Law 1. Why Enforce Contracts 2. Where Contracts Should Not Be Enforced 3. The Content of the Contract 4. Breach and Remedies for Breach Plus or minus… 6

7. A Law and Econ PerspectiveLe mot de Tony Kronman Dean Henry Manne, George Mason Insider Trading and the Stock Market 1965

8. A Law and Econ PerspectiveLe mot de Tony Kronman Dean Henry Manne, George Mason Insider Trading and the Stock Market 1965 Ronald Coase, U. of Chicago The Problem of Social Cost 1960 8

9. A Law and Econ PerspectiveLe mot de Tony Kronman Dean Henry Manne, George Mason Insider Trading and the Stock Market 1965 Ronald Coase, U. of Chicago The Problem of Social Cost 1960 Hon. Richard Posner University of Chicago Economic Analysis of Law 1973 9

10. A Preliminary Question • Who cares if we enforce contracts? • The nihilism of the 1970s: What’s wrong with this contract? • “If one person does not lose, the other does not gain.” Augustine • The rise of consumerism

11. So why enforce contracts? • Casebook suggests two principles • The Efficiency Norms of Law and Economics • An “Autonomy Principle” • Vas ist das?

12. AutonomyOne way of understanding it • My personal freedom expands when I have the freedom to bind myself • Rousseau: people must be forced to be free • Now: must people be free to be forced? • Paradoxical?

13. AutonomyOne way of understanding it My personal freedom expands when I have the freedom to bind myself Rousseau: people must be forced to be free Now: must people be free to be forced? They can only be subject to contractual fetters if the institutions of promising and contract law exist

14. Autonomy • So why is it desirable that promissory institutions exist? • Can’t breach a contract without them

15. Autonomy • So why is it desirable that promissory institutions exist? • Can’t breach a contract without them • And I can’t slide home without the game of baseball

16. Autonomy So why is it desirable that promissory institutions exist? Can’t breach a contract without them And I can’t slide home without the game of baseball So how to come up with an argument for either institution, without attributing some outside value to the game? Suppose it was shown that contractual enforcement made everyone miserable?

17. Could promising exist without promissory institutions? The Kingdom of Tonga

18. The Queen of Tonga With the Queen Mother at the Coronation, 1953

19. The Queen of Tonga With her Prime Minister, Coronation 1953

20. TongaWhere People Don’t Promise • There is no word for “promise” in Tonganese • “I intend to do x, but if I change my mind, well, then was then, now is now.”

21. TongaWhere People Don’t Promise • There is no word for “promise” in Tonganese • “I intend to do x, but if I change my mind, well, then was then, now is now.” • In such a place, is an autonomy analysis of promises intelligible?

22. David Hume “A promise is not intelligible naturally, nor antecedent to human conventions.”

23. Hume didn’t think that all morality is conventional • Non-conventional Natural vs. Conventional Artificial duties • Can you suggest some examples of non-conventional rules?

24. Some examples of non-conventional rules? • Consider: “You think that killing x is wrong, but that’s just because you have a convention that x count as people.” • Is that persuasive?

25. Promising, on the other hand, rests on a language convention • How could I will myself to be bound by a promise in Tonga? • Hume: There is no mental act that creates an obligation, or that need accompany it.

26. Promising, on the other hand, rests on a language convention • Which raises the question: Are such institutions desirable? • If so, we have an answer why people should perform their promises • Otherwise they would subvert a valuable institution

27. Promising, on the other hand, rests on a language convention • So just what is the benefit afforded by promissory institutions? • A greater assurance of performance • Which is strengthened when contractual sanctions are added to moral ones.

28. Does the sanction provided by promissory institutions suffice? • Men being naturally selfish, or endow'd only with a confin'd generosity, they are not easily induc'd to perform any action for the interest of strangers, except with a view to some reciprocal advantage

29. Contracts in the State of NatureHobbes, Leviathan 14.18 (1651) • If a covenant be made wherein neither of the parties perform presently, but trust one another, in the condition of mere nature (which is a condition of war of every man against every man) upon any reasonable suspicion, it is void… • For he that performeth first hath no assurance the other will perform after, because the bonds of words are too weak to bridle men's ambition, avarice, anger, and other passions, without the fear of some coercive power; which in the condition of mere nature, where all men are equal, and judges of the justness of their own fears, cannot possibly be supposed. And therefore he which performeth first doth but betray himself to his enemy.

30. The Prisoners’ DilemmaUnderliesHobbes’ Insight • A simple game that has become the dominant paradigm for social scientists since it was invented about 1960. • How the game works – and why didn’t it work for Dilbert

31. PD games help to explain why we do dumb things • Over-fish lakes and oceans • Pollute • Arms race • Fail to exploit bargaining gains

32. Modeling PD games • Game theoretic problems: payoffs for each player depend on actions of both

33. Hollywood gets in the act Russell Crowe as John Nash in “A Beautiful Mind”

34. The need for poetic license

35. Modeling PD games • Game theoretic problems: payoffs for each player depend on actions of both • Two possible strategies: A party cooperates when he performs value-increasing promises, and defects when he breaches

36. Modeling Two-party choice Player 1

37. Modeling Two-party choice Player 1

38. Modeling Two-party choice: Player 2 Player 2

39. Modeling Two-party choicePlayer 2 Player 2

40. Modeling Two-party Choice Both Cooperate Player 2 Player 1

41. Modeling Two-party ChoiceBoth Defect Player 2 Player 1

42. Modeling Two-party ChoiceSucker’s payoff for Player 1 Player 2 Player 1

43. Modeling Two-party ChoicePlayer 1’s temptation to defect Player 2 Player 1

44. Modeling Two-party Choice Player 2 Player 1

45. Bargains as a Prisoner Dilemma game Cooperation: Promise and PerformDefect: Promise and Breach Player 2 Player 1

46. Let’s apply this to promising Player 2 Player 1

47. Plugging in payoffsFirst number is payoff for Player 1,Second number is payoff for Player 2 Player 2 Player 1

48. Defection dominates for Player 1 Player 1  

49. Defection dominates for Player 2 Player 2  

50. The possibility of defection destroys trust Your corn is ripe today, mine will be so tomorrow… (Hume’s Treatise III.ii.V)