Enforcing contracts in dysfunctional legal systems: The close relationship between public and private orders. A Reply to McMillan and Woodruff

Michigan Law Review

Volumn 98, Issue 8, 1998, Pages 2459-2479

  Porat, Ariel ^a  

^a NONE

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EID: 0347807566     PISSN: 00262234     EISSN: None     Source Type: Journal    
DOI: 10.2307/1290350     Document Type: Article

References (78)

1. See John McMillan & Christopher Woodruff, Private Order Under Dysfunctional Public Order, 98 MICH. L. REV. 2421 (2000). Writers differ on the priority of public order over private order. For the view that "the justification for centralized law [which is similar to the "public order" terminology used in these comments] begins with the identification of a failure in the incentive structure of social norms," see Robert D. Cooter, Decentralized Law for a Complex Economy: The Structural Approach to Adjudicating the New Law Merchant, 144 U. PA. L. REV. 1643, 1643-44 (1996); Robert D. Cooter, The Theory of Market Modernization of Law, 16 INT'L REV. L. & ECON. 141 (1996). For a preference of public order, see Eric A. Posner, Law, Economics, and Inefficient Norms, 144 U. PA. L. REV. 1697 (1996). For a critical comment on both Cooter and Posner, see Avery Katz, Taking Private Ordering Seriously, 144 U. PA. L. REV. 1745 (1996). For a preference of private order over public order because the latter produces legitimate and illegitimate rules, while the former generally produces legitimate rules, see Jonathan R. Macey, Public and Private Ordering and the Production of Legitimate and Illegitimate Legal Rules, 82 CORNELL L. REV. 1123 (1997). The classic, pioneering work that discusses the advantages of private order is ROBERT C. ELLICKSON, ORDER WITHOUT LAW (1991).
2. See John McMillan & Christopher Woodruff, Private Order Under Dysfunctional Public Order, 98 MICH. L. REV. 2421 (2000). Writers differ on the priority of public order over private order. For the view that "the justification for centralized law [which is similar to the "public order" terminology used in these comments] begins with the identification of a failure in the incentive structure of social norms," see Robert D. Cooter, Decentralized Law for a Complex Economy: The Structural Approach to Adjudicating the New Law Merchant, 144 U. PA. L. REV. 1643, 1643-44 (1996); Robert D. Cooter, The Theory of Market Modernization of Law, 16 INT'L REV. L. & ECON. 141 (1996). For a preference of public order, see Eric A. Posner, Law, Economics, and Inefficient Norms, 144 U. PA. L. REV. 1697 (1996). For a critical comment on both Cooter and Posner, see Avery Katz, Taking Private Ordering Seriously, 144 U. PA. L. REV. 1745 (1996). For a preference of private order over public order because the latter produces legitimate and illegitimate rules, while the former generally produces legitimate rules, see Jonathan R. Macey, Public and Private Ordering and the Production of Legitimate and Illegitimate Legal Rules, 82 CORNELL L. REV. 1123 (1997). The classic, pioneering work that discusses the advantages of private order is ROBERT C. ELLICKSON, ORDER WITHOUT LAW (1991).
3. See John McMillan & Christopher Woodruff, Private Order Under Dysfunctional Public Order, 98 MICH. L. REV. 2421 (2000). Writers differ on the priority of public order over private order. For the view that "the justification for centralized law [which is similar to the "public order" terminology used in these comments] begins with the identification of a failure in the incentive structure of social norms," see Robert D. Cooter, Decentralized Law for a Complex Economy: The Structural Approach to Adjudicating the New Law Merchant, 144 U. PA. L. REV. 1643, 1643-44 (1996); Robert D. Cooter, The Theory of Market Modernization of Law, 16 INT'L REV. L. & ECON. 141 (1996). For a preference of public order, see Eric A. Posner, Law, Economics, and Inefficient Norms, 144 U. PA. L. REV. 1697 (1996). For a critical comment on both Cooter and Posner, see Avery Katz, Taking Private Ordering Seriously, 144 U. PA. L. REV. 1745 (1996). For a preference of private order over public order because the latter produces legitimate and illegitimate rules, while the former generally produces legitimate rules, see Jonathan R. Macey, Public and Private Ordering and the Production of Legitimate and Illegitimate Legal Rules, 82 CORNELL L. REV. 1123 (1997). The classic, pioneering work that discusses the advantages of private order is ROBERT C. ELLICKSON, ORDER WITHOUT LAW (1991).
4. See John McMillan & Christopher Woodruff, Private Order Under Dysfunctional Public Order, 98 MICH. L. REV. 2421 (2000). Writers differ on the priority of public order over private order. For the view that "the justification for centralized law [which is similar to the "public order" terminology used in these comments] begins with the identification of a failure in the incentive structure of social norms," see Robert D. Cooter, Decentralized Law for a Complex Economy: The Structural Approach to Adjudicating the New Law Merchant, 144 U. PA. L. REV. 1643, 1643-44 (1996); Robert D. Cooter, The Theory of Market Modernization of Law, 16 INT'L REV. L. & ECON. 141 (1996). For a preference of public order, see Eric A. Posner, Law, Economics, and Inefficient Norms, 144 U. PA. L. REV. 1697 (1996). For a critical comment on both Cooter and Posner, see Avery Katz, Taking Private Ordering Seriously, 144 U. PA. L. REV. 1745 (1996). For a preference of private order over public order because the latter produces legitimate and illegitimate rules, while the former generally produces legitimate rules, see Jonathan R. Macey, Public and Private Ordering and the Production of Legitimate and Illegitimate Legal Rules, 82 CORNELL L. REV. 1123 (1997). The classic, pioneering work that discusses the advantages of private order is ROBERT C. ELLICKSON, ORDER WITHOUT LAW (1991).
5. See John McMillan & Christopher Woodruff, Private Order Under Dysfunctional Public Order, 98 MICH. L. REV. 2421 (2000). Writers differ on the priority of public order over private order. For the view that "the justification for centralized law [which is similar to the "public order" terminology used in these comments] begins with the identification of a failure in the incentive structure of social norms," see Robert D. Cooter, Decentralized Law for a Complex Economy: The Structural Approach to Adjudicating the New Law Merchant, 144 U. PA. L. REV. 1643, 1643-44 (1996); Robert D. Cooter, The Theory of Market Modernization of Law, 16 INT'L REV. L. & ECON. 141 (1996). For a preference of public order, see Eric A. Posner, Law, Economics, and Inefficient Norms, 144 U. PA. L. REV. 1697 (1996). For a critical comment on both Cooter and Posner, see Avery Katz, Taking Private Ordering Seriously, 144 U. PA. L. REV. 1745 (1996). For a preference of private order over public order because the latter produces legitimate and illegitimate rules, while the former generally produces legitimate rules, see Jonathan R. Macey, Public and Private Ordering and the Production of Legitimate and Illegitimate Legal Rules, 82 CORNELL L. REV. 1123 (1997). The classic, pioneering work that discusses the advantages of private order is ROBERT C. ELLICKSON, ORDER WITHOUT LAW (1991).
6. See John McMillan & Christopher Woodruff, Private Order Under Dysfunctional Public Order, 98 MICH. L. REV. 2421 (2000). Writers differ on the priority of public order over private order. For the view that "the justification for centralized law [which is similar to the "public order" terminology used in these comments] begins with the identification of a failure in the incentive structure of social norms," see Robert D. Cooter, Decentralized Law for a Complex Economy: The Structural Approach to Adjudicating the New Law Merchant, 144 U. PA. L. REV. 1643, 1643-44 (1996); Robert D. Cooter, The Theory of Market Modernization of Law, 16 INT'L REV. L. & ECON. 141 (1996). For a preference of public order, see Eric A. Posner, Law, Economics, and Inefficient Norms, 144 U. PA. L. REV. 1697 (1996). For a critical comment on both Cooter and Posner, see Avery Katz, Taking Private Ordering Seriously, 144 U. PA. L. REV. 1745 (1996). For a preference of private order over public order because the latter produces legitimate and illegitimate rules, while the former generally produces legitimate rules, see Jonathan R. Macey, Public and Private Ordering and the Production of Legitimate and Illegitimate Legal Rules, 82 CORNELL L. REV. 1123 (1997). The classic, pioneering work that discusses the advantages of private order is ROBERT C. ELLICKSON, ORDER WITHOUT LAW (1991).
7. See John McMillan & Christopher Woodruff, Private Order Under Dysfunctional Public Order, 98 MICH. L. REV. 2421 (2000). Writers differ on the priority of public order over private order. For the view that "the justification for centralized law [which is similar to the "public order" terminology used in these comments] begins with the identification of a failure in the incentive structure of social norms," see Robert D. Cooter, Decentralized Law for a Complex Economy: The Structural Approach to Adjudicating the New Law Merchant, 144 U. PA. L. REV. 1643, 1643-44 (1996); Robert D. Cooter, The Theory of Market Modernization of Law, 16 INT'L REV. L. & ECON. 141 (1996). For a preference of public order, see Eric A. Posner, Law, Economics, and Inefficient Norms, 144 U. PA. L. REV. 1697 (1996). For a critical comment on both Cooter and Posner, see Avery Katz, Taking Private Ordering Seriously, 144 U. PA. L. REV. 1745 (1996). For a preference of private order over public order because the latter produces legitimate and illegitimate rules, while the former generally produces legitimate rules, see Jonathan R. Macey, Public and Private Ordering and the Production of Legitimate and Illegitimate Legal Rules, 82 CORNELL L. REV. 1123 (1997). The classic, pioneering work that discusses the advantages of private order is ROBERT C. ELLICKSON, ORDER WITHOUT LAW (1991).
8. See McMillan & Woodruff, supra note 1, at 2446-55.
9. See id. at 2451.
10. See Lisa Bernstein, Opting out of the Legal System: Extralegal Contractual Relations in the Diamond Industry, 21 J. LEGAL STUD. 115, 134-35 (1992) [hereinafter Bernstein, The Diamond Industry].
11. See Lisa Bernstein, Merchant Law in a Merchant Court: Rethinking the Code's Search for Immanent Business Norms. 144 U. PA. L. REV. 1765 (1996) [hereinafter Bernstein, Immanent Business Norms].
12. See McMillan & Woodruff, supra note 1, at 2426-32.
13. See Bernstein, The Diamond Industry, supra note 4, at 136. Sometimes the secrecy consideration will make sellers reluctant to disclose this information in the courts. See id. at 134-135. See also Omri Ben-Shahar & Lisa Bernstein, The Secrecy Interest in Contract Law, 109 YALE L.J. 1885 (2000) (arguing that secrecy interest deters aggrieved parties from suing for breach of contract, leading to underdeterrence of parties in breach).
14. See Bernstein, The Diamond Industry, supra note 4, at 136. Sometimes the secrecy consideration will make sellers reluctant to disclose this information in the courts. See id. at 134-135. See also Omri Ben-Shahar & Lisa Bernstein, The Secrecy Interest in Contract Law, 109 YALE L.J. 1885 (2000) (arguing that secrecy interest deters aggrieved parties from suing for breach of contract, leading to underdeterrence of parties in breach).
15. On the requirement of certainty and the courts' tendency to relax it in certain cases, see U.C.C. § 1-106 (1999): RESTATEMENT (SECOND) OF CONTRACTS § 352 (1981); E. ALLAN FARNSWORTH, CONTRACTS 829-34 (3d ed. 1999);
16. JAMES J. WHITE & ROBERT S. SUMMERS, UNIFORM COMMERCIAL CODE 379-81 (4th ed. 1995).
17. See FARNSWORTH, supra note 8, at 834. The classic case in which an English court awarded damages for lost chances to a winner in a preliminary round in a beauty contest is Chaplin v. Hicks, 2 K.B. 786 (1911); see also Rombola v. Cosindas, 220 N.E.2d 919 (Mass. 1966).
18. See U.C.C. § 2-718(1) (1999): RESTATEMENT (SECOND) OF CONTRACTS § 356 (1981). Both sections direct courts to consider the reasonableness of the liquidated damages clause in light of the anticipated or actual loss caused by the breach and the difficulties of proving loss. The U.C.C. adds another consideration which is "the inconvenience or nonfeasibility of otherwise obtaining an adequate remedy." U.C.C. § 2-718(1). Accordingly, courts can use the anticipated damages and the difficulties of proof as the main considerations, and ignore the exact amount of the actual loss, when proof is so problematic.
19. See David Charny, Nonlegal Sanctions in Commercial Relationships, 104 HARV. L. REV. 373. 409-10 (1990) [hereinafter Charny, Nonlegal Sanctions].
20. See McMillan & Woodruff, supra note 1, at 2426-32.
21. This also holds true for social networks. See infra Part IV.
22. See Bernstein, Immanent Business Norms, supra note 5, at 1787-815.
23. See Lisa Bernstein, Private Commercial Law in the Cotton Industry: Value Creation Through Rules, Norms, and Institutions, 99 MICH. L. REV. (forthcoming June 2001) [hereinafter Bernstein, The Cotton Industry] (arguing that the clarity of the rules applied by tribunals operating in the cotton industry makes them more attractive to parties than courts applying the more vague legal rules of the U.C.C.).
24. U.C.C. §§ 1-201(3), (11), 1-205, 2-208 (1999); RESTATEMENT (SECOND) OF CONTRACTS §§ 219-223 (1981).
25. The trend in modern contract law is toward a less formal application of the parole evidence rule. This trend is reflected in U.C.C. § 2-202 (1999). and in RESTATEMENT (SECOND) OF CONTRACTS §§ 209-217 (1981); see also FARNSWORTH, supra note 8, at 435; Masterson v. Sine, 436 P.2d 561 (Cal. 1968).
26. See U.C.C. § 1-203 (1999); RESTATEMENT (SECOND) OF CONTRACTS § 205 (1981).
27. See RESTATEMENT (SECOND) OF CONTRACTS § 211 (1981); Darner Motor Sales v. Universal Underwriters. 682 P.2d 388 (Ariz. 1984).
28. See U.C.C. §§ 1-201(3), (11), 1-205 (1999); RESTATEMENT (SECOND) OF CONTRACTS §§ 219-222 (1981).
29. See Charny, Nonlegal Sanctions, supra note 11, at 409-10.
30. See Bernstein, The Diamond Industry, supra note 4, at 126-27; Bernstein, Immanent Business Norms, supra note 5, at 1771-78; Bernstein, The Cotton Industry, supra note 15.
31. See Bernstein, The Diamond Industry, supra note 4, at 126-27; Bernstein, Immanent Business Norms, supra note 5, at 1771-78; Bernstein, The Cotton Industry, supra note 15.
32. See Bernstein, The Diamond Industry, supra note 4, at 126-27; Bernstein, Immanent Business Norms, supra note 5, at 1771-78; Bernstein, The Cotton Industry, supra note 15.
33. See. e.g., Williams v. Wilson, 181 F. Supp. 351 (E.D. Ark. 1960); Sayres v. Decker Auto. Co., 145 N.E. 744 (N.Y. 1924).
34. See RESTATEMENT (SECOND) OF CONTRACTS § 186 (1981).
35. See FARNSWORTH, supra note 8, at 337-43.
36. See, e.g., Plumlee v. Paddock, 832 S.W.2d 757 (Tex. Ct. App. 1992) (refusing to enforce contract whereby attorneys would pay owner of ambulance company for injury case referrals); Garden State Plaza Corp. v. S.S. Kresge Co., 189 A.2d 448 (N.J. Super. Ct. App. Div. 1963) (refusing to enforce contractual provision that forbade using previous negotiations and dealings between the parties to interpret the contract).
37. See Bernstein, The Cotton Industry, supra note 15 ("The availability of a fast and inexpensive way of obtaining and enforcing a judgement, transforms some meritorious claims that would have had a negative expected value had they been pursued in litigation into claims with a positive expected return.").
38. See id.
39. See Bernstein, The Diamond Industry, supra note 4, at 124, 134-35.
40. See IAN R. MACNEIL, THE NEW SOCIAL CONTRACT: AN INQUIRY INTO MODERN CONTRACTUAL RELATIONS 24-25, 31 (1980): Stewart Macaulay, An Empirical View of Contract, 1985 WIS. L. REV. 465 (1985); Stewart Macaulay, Non-Contractual Relations in Business, 28 AM. SOC. REV. 55 (1963).
41. See IAN R. MACNEIL, THE NEW SOCIAL CONTRACT: AN INQUIRY INTO MODERN CONTRACTUAL RELATIONS 24-25, 31 (1980): Stewart Macaulay, An Empirical View of Contract, 1985 WIS. L. REV. 465 (1985); Stewart Macaulay, Non-Contractual Relations in Business, 28 AM. SOC. REV. 55 (1963).
42. See IAN R. MACNEIL, THE NEW SOCIAL CONTRACT: AN INQUIRY INTO MODERN CONTRACTUAL RELATIONS 24-25, 31 (1980): Stewart Macaulay, An Empirical View of Contract, 1985 WIS. L. REV. 465 (1985); Stewart Macaulay, Non-Contractual Relations in Business, 28 AM. SOC. REV. 55 (1963).
43. Cf. Robert Cooter, Normative Failure Theory of Law, 82 CORNELL L. REV. 947 (1997) (discussing, inter alia, the ways law or state can ignore, strengthen, or undermine social norms); Posner, supra note 1, at 1725-36 (discussing several approaches to the problem of dealing with inefficient social norms).
44. See FARNSWORTH, supra note 8, at 561-62.
45. See U.C.C. § 2-609 (1999); RESTATEMENT (SECOND) OF CONTRACTS § 251 (1981); FARNSWORTH, supra note 8, at 613-16.
46. See U.C.C. § 2-717.
47. See U.C.C. §§ 7-209, 7-307.
48. See U.C.C. § 2-718(2).
49. U.C.C. §§ 1-201(3), (11), 1-205, 2-208; RESTATEMENT (SECOND) OF CONTRACTS §§ 219-223 (1981).
50. But see Bernstein, Immanent Business Norms, supra note 5, at 1796-802 (arguing that traders in the grain and feed industry would expect that course of performance and course of dealing will not trump the express terms of the contract at an end-game dispute). For a critical view of Bernstein's argument, see David Charny, Illusions of a Spontaneous Order: "Norms" in Contractual Relationships, 144 U. PA. L. REV. 1841, 1853-57 (1996).
51. But see Bernstein, Immanent Business Norms, supra note 5, at 1796-802 (arguing that traders in the grain and feed industry would expect that course of performance and course of dealing will not trump the express terms of the contract at an end-game dispute). For a critical view of Bernstein's argument, see David Charny, Illusions of a Spontaneous Order: "Norms" in Contractual Relationships, 144 U. PA. L. REV. 1841, 1853-57 (1996).
52. See supra Section II.B.1.
53. McMillan & Woodruff, supra note 1, at 2450, write: "Effective courts . . . lower the benefit of information gathering, resulting in less well-informed manufacturers." I believe that this is not necessarily the case. In fact, a functioning public order suffering from information problems may increase the benefits of information gathering, since this information is useful not only to the private but also to the public order. Actually, there is a trade-off here: Effective courts lower the benefits of information gathering for the use of the private order, but, at the same time, increase the benefits of information gathering to a public order that has become functional yet retains inadequate methods of information-gathering, McMillan & Woodruff's claim, then, becomes stronger as the need for information in the public order lessens.
54. See, e.g., Flower City Painting Contractors, Inc. v. Gumina Constr. Co., 591 F.2d 162 (2d Cir. 1979) (preferring the reasonable understanding of one party to the usage of trade prevailing in the industry).
55. See Bernstein. Immanent Business Norms, supra note 5, at 1796-802 (distinguishing relationship-preserving norms from end-game norms).
56. C.A. 3833/93, Levin v. Levin, 48(2) P.D. 862 (1994).
57. See id.
58. For the view that courts should respect the parties' determination that their commitments would not be legally enforceable, see Charny, Nonlegal Sanctions, supra note 11, at 383-84. Cf. Melvin Eisenberg, The World of Contract and the World of Gift, 85 CAL. L. REV. 821 (1997) (arguing, inter alia, against legalization of the world of gift).
59. For the view that courts should respect the parties' determination that their commitments would not be legally enforceable, see Charny, Nonlegal Sanctions, supra note 11, at 383-84. Cf. Melvin Eisenberg, The World of Contract and the World of Gift, 85 CAL. L. REV. 821 (1997) (arguing, inter alia, against legalization of the world of gift).
60. For a thorough discussion of nonlegal sanctions - monetary, reputation-based and hybrid sanctions - see Bernstein, The Cotton Industry, supra note 15.
61. Actually, evaluation is quite problematic in these cases, but I ignore this issue here.
62. However, a counterargument could be raised, that the total losses caused by the breach are in the amount of 140, which includes losses to the aggrieved party and losses to the party in breach. Accordingly, efficiency requires the party in breach to internalize the total amount of 140; otherwise, he may breach inefficiently. Thus, to achieve perfect internalization of losses, he should pay 100 to the aggrieved party. Cf. Robert Cooter & Ariel Porat, Does Risk to Oneself Increase the Care Owed to Others? Law and Economics in Conflict, 29 J. LEGAL STUD. 19 (2000) (arguing that in determining the duty of care in negligence law courts mistakenly ignore the reduction in the injurer's self risk caused by the insurer's precautions). This counterargument deserves further elaboration, in which I cannot engage here. The main weakness of the counterargument is that it treats the injury to reputation suffered by the party in breach as a social cost, while it is actually a private cost with a correlative benefit to society at large: the breach supplies information to society about the trustworthiness of the party in breach. For further elaboration, see Robert Cooter & Ariel Porat, Should Court Deduct Non-Legal Sanctions from Damages? (October 2000) (unpublished manuscript on file with author). For the argument that nonlegal sanctions may supplement legal sanctions and prevent underdeterrence, see Charny, Nonlegal Sanctions, supra note 11, at 407.
63. However, a counterargument could be raised, that the total losses caused by the breach are in the amount of 140, which includes losses to the aggrieved party and losses to the party in breach. Accordingly, efficiency requires the party in breach to internalize the total amount of 140; otherwise, he may breach inefficiently. Thus, to achieve perfect internalization of losses, he should pay 100 to the aggrieved party. Cf. Robert Cooter & Ariel Porat, Does Risk to Oneself Increase the Care Owed to Others? Law and Economics in Conflict, 29 J. LEGAL STUD. 19 (2000) (arguing that in determining the duty of care in negligence law courts mistakenly ignore the reduction in the injurer's self risk caused by the insurer's precautions). This counterargument deserves further elaboration, in which I cannot engage here. The main weakness of the counterargument is that it treats the injury to reputation suffered by the party in breach as a social cost, while it is actually a private cost with a correlative benefit to society at large: the breach supplies information to society about the trustworthiness of the party in breach. For further elaboration, see Robert Cooter & Ariel Porat, Should Court Deduct Non-Legal Sanctions from Damages? (October 2000) (unpublished manuscript on file with author). For the argument that nonlegal sanctions may supplement legal sanctions and prevent underdeterrence, see Charny, Nonlegal Sanctions, supra note 11, at 407.
64. However, a counterargument could be raised, that the total losses caused by the breach are in the amount of 140, which includes losses to the aggrieved party and losses to the party in breach. Accordingly, efficiency requires the party in breach to internalize the total amount of 140; otherwise, he may breach inefficiently. Thus, to achieve perfect internalization of losses, he should pay 100 to the aggrieved party. Cf. Robert Cooter & Ariel Porat, Does Risk to Oneself Increase the Care Owed to Others? Law and Economics in Conflict, 29 J. LEGAL STUD. 19 (2000) (arguing that in determining the duty of care in negligence law courts mistakenly ignore the reduction in the injurer's self risk caused by the insurer's precautions). This counterargument deserves further elaboration, in which I cannot engage here. The main weakness of the counterargument is that it treats the injury to reputation suffered by the party in breach as a social cost, while it is actually a private cost with a correlative benefit to society at large: the breach supplies information to society about the trustworthiness of the party in breach. For further elaboration, see Robert Cooter & Ariel Porat, Should Court Deduct Non-Legal Sanctions from Damages? (October 2000) (unpublished manuscript on file with author). For the argument that nonlegal sanctions may supplement legal sanctions and prevent underdeterrence, see Charny, Nonlegal Sanctions, supra note 11, at 407.
65. For a discussion of the differences between legal and nonlegal sanctions with regard to the incentives they supply to parties to a contract, see id. at 400-03.
66. Subject to some limitations, such as the requirement of certainty of damages and the "duty" to mitigate damages. Farnsworth, supra note 8, at 806-07, 829-30.
67. I do not refer here to the question of whether these sanctions are efficient. Cf. Bernstein, The Cotton Industry, supra note 15.
68. Robert Cooter argues that when precaution is bilateral, parties would be supplied with the most efficient incentives if both were expected to bear the entire burden of the harm caused by the breach (or the wrongdoing). See Robert Cooter, Unity in Tort, Contract, and Property, 73 CAL. L. REV. 1, 3-4 (1985). A private order that imposed on the party in breach sanctions equivalent to the losses caused by the breach and, at the same time, left the aggrieved party uncompensated, is very close to the optimal legal regime considered by Cooter.
69. This actually may provide an additional explanation as to why parties to a contract operating within certain types of private orders are more cooperative than parties operating within public order. Indeed, knowing that she will bear her own losses in the event of breach, an aggrieved party will lend to cooperate with the other party and assist him in different ways, even if she does not feel obligated to do so.
70. In the diamond industry, arbitrators may sometimes impose sanctions on the party in breach involving not only compensation to the aggrieved party but also a donation to charity. See Bernstein, The Diamond Industry, supra note 4, at 127. This system may be justified in that it provides the aggrieved party more efficient incentives than full compensation.
71. For another solution, based on the apportionment of damages between the parties, see ARIEL PORAT, HAGANAT ASHAM TOREM BE-DINE HOZIM [CONTRIBUTORY FAULT IN THE LAW OF CONTRACT] (1997); Ariel Porat, Contributory Negligence in Contract Law: Toward a Principled Approach. 28 U. BRIT. COLUM. L. REV. 141 (1994): Ariel Porat, The Contributory Negligence Defence and the Ability to Rely on the Contract. 111 L. Q. REV. 228 (1995).
72. For another solution, based on the apportionment of damages between the parties, see ARIEL PORAT, HAGANAT ASHAM TOREM BE-DINE HOZIM [CONTRIBUTORY FAULT IN THE LAW OF CONTRACT] (1997); Ariel Porat, Contributory Negligence in Contract Law: Toward a Principled Approach. 28 U. BRIT. COLUM. L. REV. 141 (1994): Ariel Porat, The Contributory Negligence Defence and the Ability to Rely on the Contract. 111 L. Q. REV. 228 (1995).
73. For another solution, based on the apportionment of damages between the parties, see ARIEL PORAT, HAGANAT ASHAM TOREM BE-DINE HOZIM [CONTRIBUTORY FAULT IN THE LAW OF CONTRACT] (1997); Ariel Porat, Contributory Negligence in Contract Law: Toward a Principled Approach. 28 U. BRIT. COLUM. L. REV. 141 (1994): Ariel Porat, The Contributory Negligence Defence and the Ability to Rely on the Contract. 111 L. Q. REV. 228 (1995).
74. This solution obviously raises several difficulties, which cannot be discussed within the scope of these comments. For instance: How does a solution whereby the aggrieved party is not compensated, but the party in breach pays damages, affect compromises between the parties? How does it affect renegotiation? What incentives does it provide for the parties' opportunistic behavior? Another question concerns the incentive of the aggrieved party to initiate the imposition of sanctions on the party in breach when the aggrieved party derives no benefit from the imposition. On the latter issue, see Bernstein, The Cotton Industry, supra note 15 (clarifying the motivation of the aggrieved party to impose nonlegal sanctions on the party in breach, even if it yields no pecuniary gains to him), and see also McMillan & Woodruff, supra note 1, at 2430 (discussing the free rider problem, which decreases incentives to aggrieved parties to impose nonlegal sanctions, and possible ways to overcome it). In another (unpublished) paper I am co-authoring with Robert Cooter, we develop the idea of third party transfer contract, which we call an "anti-insurance contract." We argue that on some occasions, the parties can charge the third party (the "anti-insurer") a premium for transferring him the right to the damages in the event of a breach.
75. This solution obviously raises several difficulties, which cannot be discussed within the scope of these comments. For instance: How does a solution whereby the aggrieved party is not compensated, but the party in breach pays damages, affect compromises between the parties? How does it affect renegotiation? What incentives does it provide for the parties' opportunistic behavior? Another question concerns the incentive of the aggrieved party to initiate the imposition of sanctions on the party in breach when the aggrieved party derives no benefit from the imposition. On the latter issue, see Bernstein, The Cotton Industry, supra note 15 (clarifying the motivation of the aggrieved party to impose nonlegal sanctions on the party in breach, even if it yields no pecuniary gains to him), and see also McMillan & Woodruff, supra note 1, at 2430 (discussing the free rider problem, which decreases incentives to aggrieved parties to impose nonlegal sanctions, and possible ways to overcome it). In another (unpublished) paper I am co-authoring with Robert Cooter, we develop the idea of third party transfer contract, which we call an "anti-insurance contract." We argue that on some occasions, the parties can charge the third party (the "anti-insurer") a premium for transferring him the right to the damages in the event of a breach.
76. Some of the problems mentioned in note 53, supra, are also present here. The evaluation of nonlegal sanctions is another problem. I also ignore here the effect of the deduction of the nonlegal sanction on the development of the private order. A thorough discussion of the relations between legal and nonlegal sanctions should address all these problems.
77. Cf. Bernstein, Immanent Business Norms, supra note 5, at 1791-92 (arguing that when breach is observable but not verifiable, parties will prefer the extra-legal realm to the legal one). My argument is that social networks are effective even when breach is not observable either by third parties or by the aggrieved party.
78. It could result in repression of the private order because, the better the public order, the less the need for a private one. It could sometimes lead to a strengthening of the private order, because acknowledging the norms of the private order within the public one may make the development of these norms more profitable. See supra Section III.A.