Abstract
Professor Goldberg is the Jerome L. Greene Professor of Transactional Law at Columbia Law School and a prolific writer and scholar in the area of contract law, particularly from the law and economics perspective. This book is part of a Rethinking Law series of books that “address their field from a new angle, expose the weaknesses of existing frameworks, or ‘re-frame’ the topic in some way.” The purpose of this book review is to assess this claim in relation to the views expressed in Rethinking Contract Law and Contract Design.
One of the early contributions Professor Goldberg makes in the book is his claim that contract law is not efficient (p.1). This is a fairly bold statement given that the mantra of law and economics adherents is their much idealized and stylized argument that the law continually strives to achieve efficient rules and doctrine. The fallacy of this position arrives when someone studies real contracts, contracting processes and bargaining outcomes, as Professor Goldberg has clearly done throughout his extensive scholarly career. This is perfectly expressed in his statement in the book that “doctrine is a hurdle that good lawyers must overcome” (p.1). It is indeed rare for an academic with such a strong law and economics background to make such a statement. This early and tantamount to blasphemous position frames the rest of the book as it deals with cases that involve a myriad of contracting issues, such as: direct damages; consequential damages; excuse; changed circumstances; and offer and acceptance.
Rather than rehash the various contract law issues that the book addresses, I would rather spend some time discussing several conceptual themes that make novel and insightful contributions in the area of contract analysis. As alluded to previously, one of the main concepts weaved throughout the book is the notion that the contract designer’s main challenge is to overcome the law’s inefficiency as it is expressed though default contract doctrines and poor drafting practices. As an example of the latter, in one chapter Professor Goldberg discusses the poor draftsmanship of California author–publisher agreements, particularly as they relate to when the publisher exercises their option not to publish and this is classified as a breach that can then yield significant damages (pp.69–70). Implicit throughout the book is that the contract-designer seeks to design-around such bad default rules and poor draftsmanship practices to achieve a singular purpose: superior business results.
Professor Goldberg’s encyclopedic knowledge of contract law and cases bolster his argument that idiosyncratic contract drafting capabilities play a large role in overcoming the contracting morass that the law presents to the inexperienced, or unimaginative drafter. Again, the emphasis on the contract drafter-designer’s idiosyncratic and individual capabilities differs greatly from the stock law and economics practice, that is, to assume individual contracting capabilities are irrelevant for the sake of propping-up elegant mathematical models that are unrealistically predicated on efficient outcomes.
The book’s attack on judicial contract doctrine is persuasive to a behavioralist and legal realist like me since it continually looks beyond judicial opinions to assert and solidify its critique. One of the most convincing tools Professor Goldberg employs in his attack on inefficient contract doctrine is the in-depth analysis of important contract terms that were later neglected during the adjudication process. This technique is used to asses everything from venture capital agreements to movie studio contracts with actors. Goldberg’s line of analysis yields rich insight into factors that the courts rarely take into account, such as the role of trust and reputation, switching costs, and the impact that the seller’s reliance has on the price to terminate a contract. This rich qualitative analysis of the contracting process and environment reminds me of rare erudite works that examine economic behavior such as contracting from a sociological perspective and is reminiscent of Robert Ellickson’s Order Without Law: How Neighbors Settle Disputes (1991) and Stewart Macaulay’s and Ian McNeil’s important works on relational contracting. This type of broader analysis should, as Professor Goldberg argues, help the courts and practitioners to achieve better contract results, yet that is not always the case.
The limits of contract doctrine as a stable, formalistic and somewhat myopic system become evident through rich and detailed case analysis. For example, doctrinal boxes obscure simple economics in an interesting case where the primary purpose of a negotiated minimum quantity clause was to price the service and not define a remedy, as the trial court and famed law and economics-oriented Judge Posner sitting in the Seventh Circuit Court of Appeals erroneously concluded in the case of Lake River Corp. v. Carborundum Co. (769 F.2d 1284, 7th Cir. 1985). In that case, Carborundum Co. entered a three-year contract with Lake River Corp, which agreed to bag and distribute Carborundum’s chemical product. Carborundum insisted that Lake River install an expensive new bagging system for this particular contract and business relationship. This uniqueness creates what economists refer to as asset specificity. Another key aspect of this overall business deal was that Carborundum retained an option to use Lake River’s services entirely at its discretion. According to Professor Goldberg, Judge Posner and the contract litigators in this case failed to “appreciate the underlying economics of the transaction” (p.72) and instead myopically focused on the issue of whether the litigated minimum quantity clause was a penalty clause that offered an unduly excessive remedy not permitted under existing contracts doctrine. As elegantly stated and elaborated on by Professor Goldberg: “Asset specificity is, at most, a sufficient, but not necessary condition. The key feature is that the seller incurs costs by granting discretion to the buyer…The party with discretion…has to pay the opposite party…for the costs it could incur by affording that discretion. Both set a non-linear pricing formula: a fixed price independent of usage, a zero marginal price up to the minimum, and a positive marginal price thereafter.” (pp.81–82)