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A Relational Theory of Default Rules for Commercial Contracts

Scott, Robert E.

In Section I of this article, I argue that complex risk-allocation models are inconsistent in important respects with the assumption that commercial actors are rational utility maximizers. I suggest instead that rational commercial actors are motivated by a dominant strategy of cooperative risk reduction. In Section II, I use the cooperative approach to risk allocation in order to develop criteria for selecting optimal default rules. Finally, in Section III, I confront an apparent paradox: an egoistic model (though normatively implausible) best explains the default rules now in use in commercial law. I resolve that paradox by proposing a relational theory of commercial law: under this approach the pervasive use of binary default rules in commercial contracting results from the intersection of two forces. First, on the legal side, the current enforcement mechanisms are necessarily crude and inexact and are likely to remain that way. Second, in response to the weakness of the rules of legal enforcement, powerful social pressures arise to encourage the enforcement of commercial undertakings. The proper choice of default rules depends, therefore, not only on the internal operation of the legal system but also on the linkages between the legal system and the norms of social enforcement that are too often ignored. Understanding how these different systems operate together in the context of long-term commercial contracts thus offers both a positive explanation and a normative justification for the existing scheme of commercial-law default rules.

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Also Published In

Title
The Journal of Legal Studies

More About This Work

Academic Units
Law
Publisher
University of Chicago Press
Published Here
January 28, 2016
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