The Anti-Theoretical Nature of Civil Law Contract Scholarship and The Need For An Economic Theory

The Anti-Theoretical Nature of Civil Law Contract Scholarship and the Need for an Economic Theory
Aristides N. Hatzis Abstract The absence of theories developed for Roman law and the absence of grand theories in Civil contract law scholarship were outcomes of a particularistic approach to the problems created by the deficiencies of markets and driven by the need for the construction of a legal framework conducive to economic progress. The generation of efficient results by Civil law through the selection of efficient rules and standards was completed over the course of several centuries and stabilized after the great codifications. Common law had for centuries attempted to develop a similar construct that would be stable enough to facilitate economic relations. Borrowing ideas and solutions from Civil law was the easy way out. Despite the numerous legal transplants, the Common law fought hard to preserve a false independence and a parallel dilapidated coherence by building unified, conclusive, but dogmatic theories. The mimicking of Civil law has led to some efficient solutions, but with many islands of inefficiency trapped in the sea of rigid theories (bargain theory, privity, etc.). On the other hand, Civil law scholarship and practice has found it increasingly difficult to respond to the fastchanging economic circumstances. For the first time in history,
Lecturer of Philosophy of Law & Theory of Institutions, University of Athens (LL.B. 1989, LL.M. 1993, Aristotle University of Thessaloniki, Faculty of Law; LL.M. 1994, J.S.D. 1999, University of Chicago Law School). An earlier draft of this paper was presented at the 14th Annual Conference of the European Association of Law & Economics held at Barcelona, September 4-6, 1997. I wish to thank the participants for their helpful suggestions, as well as Prof. Katharina Pistor and Dr. Aspasia Tsaoussis. Thanks are also due to the many members of the Legal Studies Network (SSRN-LSN) who sent me their comments and related work. Email: ahatzis@phs.uoa.gr. Copyright 2003 by Aristides N. Hatzis.
Hatzis: The Anti-Theoretical Nature of Civil Law Contract Scholarship and the Need for an Economic Theory
economic relations have become so complicated that it is impossible for a judge endowed only with common sense to solve problems created by the dysfunctions of markets. Economic expertise is not only helpful, but also required. A responsive economic theory of contract law is almost imperative if Civil law is to continue playing the role that it has successfully performed for centuries: providing the legal framework that helps the economy function.
Table of Contents 1. The Absence of Theory: Civil vs. Common Contract Law 1.1. Too Much Theory or Too Little Certainty? 1.2. The Efficiency of Roman Law and of Contemporary Civil Contract Law 2. Economic Analysis for a Civil Contract Law 2.1. From the Absence of Theory to the Neoclassical Consensus 2.2. The Application of Economic Analysis to Greek Contract Law: Problems and Considerations 2.3. Contract Law and Distributive Justice 3. Conclusion 4. Bibliography
Commentaries on Law & Economics, Vol. 2 ( 2002)
What the Romans did not have were treatises on the law of contracts in general. We have them to superfluity. But then our day is much given to Total Theories Which Explain Everything (Except What Doesn't Fit). Tony Weir (1992: 1646)
1. The Absence of Theory: Civil vs. Common Contract Law 1.1. Too Much Theory or Too Little Certainty? I. A monograph was published in 1997 under the title The Richness of Contract Law by the well-known American contract law scholar and Professor at Cornell Law School Robert Hillman. The subtitle of the book, An Analysis and Critique of Contemporary Theories of Contract Law refers to a number of theories developed in the Common law world (and especially in the United States) on contract law, a field of law ironically declared dead three decades ago (Gilmore 1974). However, in this paper, we will be 1 discussing neither the thesis of the said book nor the problem of 2 the life or death of contract. We will rather be dealing with a question that is quite disturbing for European scholars who comparatively approach American Common law, and that arises often as they browse through the voluminous literature on the theory of Common contract law of the past one hundred years (see mainly Hillman 1997, but also Barnett 1984 and 1989, Rakoff 1996 and esp. Cheffins 1999). This question is the following: Why isn't there a similarly rich literature or a
1 [O]n the whole, contract law suitably promotes the formation and enforcement of private arrangements and ensures some degree of fairness in the exchange process. Moreover, contract law largely succeeds because it is the product of the legal system's reasonable and practical compromises over conflicting values and interests. (Hillman 1997: 2). 2 But see Farnsworth (1992) and also the symposium on The Death of Contract in 90 Nw. U. L. Rev. 1 (1995).
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similar number of theories developed for civil contract law? What 4 this question calls attention to is the absence of contemporary grand theories (cf. Gazes 1995: 36 n.59; 1997), that is, theories which purport to describe, interpret and even modify contract law in congruence with major philosophical, sociological, historical, political or economic theories and which claim universality. By undermining the formalistic mentality that permeates law as a supposedly autonomous discipline, grand theorizing has the potential of transforming legal theory from an anti-theoretical, parochial, interpretative technique into a science of social control. If we look over the impressive literature published on contract law over the last two decades in the numerous Common law (especially American) journals and law reviews, we will discover that the purely doctrinal studies have been confined to the lowranking journals and universities, to the developments and surveys of the law sections and to the comments and notes of student law review editors. Nearly all the well-known American contract scholars (and there are many) can be easily categorized according to their adherence to a specific theory, most of them being 5 6 either neoclassical or economists. All of them discuss broadly
3 According to Gazes (1995: 20, n.20 and 26, n.32), codification symbolizes the end of law's development (or at least of its flourishing). For the problems related to codification in the field of contracts, see generally Hellner (1990) and Lontai (1990). See also Ktz (1983). 4 Before World War II, and especially in the era of the major codifications, a significant but dated discussion had taken place in continental Europe (esp. Germany). The work of Friedrich Carl von Savigny's historical school and Georg Friedrich Puchta's conceptual jurisprudence (and also the less influential, more liberal and with no essential differences thought of Thibaut and Welcker) are examples of theoretical discussions that are absent today in continental Europe. See mainly Reimann (1990) and Whitman (1990), and also Reimann (1991), Klenner (1989), Ruckert (1989), Herget & Wallace (1987) and Joerges (1994). 5 When applied to contract law theory, the term neoclassical signifies something quite different from neoclassical economics, a term widely used to describe mainstream economics. See Heijdra & Lowenberg (1988), Lowenberg
theoretical issues, even when they set out to solve particular doc7 trinal problems (cf. Cheffins 1999: 199-200).
(1990), Medema & Samuels (1996), and D'Autume & Cartelier (1997). However, the similarities go beyond the mainstream status. I would characterize the neoclassical theory of contracts as a rather amateurish attempt on the part of contract scholars (in Common law under the legacy of equity and in Roman Civil law of ius praetorium) to keep in touch with the developments of economic theory after World War II (i.e. economic neoclassicism) rather than to socialize contract law. This is mostly true for the U.S.A., but also for Europe. See Hatzis (2000c). 6 From an ongoing citation study on American contract law which I am currently conducting, some preliminary findings are characteristic: In over 250 contract law articles, books or chapters most of which have been published after 1980, the scholars with more than fifty citations are [in alphabetical order, since the findings are preliminary and although there is a vast disparity of almost 140 citations between the first scholar (190) and the last]: Patrick Atiyah (Neoclassical), Randy Barnett (Consent/Libertarianism), Ronald Coase (Economics/NeoInstitutionalism), Arthur Corbin (Neoclassical), Melvin Aron Eisenberg (Neoclassical), Richard Epstein (Libertarianism/Economics), Grant Gilmore (Neoclassical/Death of Contract theory), E. Allan Farnsworth (Neoclassical), Lon Fuller (Neoclassical), Duncan Kennedy (CLS), Friedrich Kessler (Neoclassical), Anthony Kronman (Economics Neoclassical), Stewart Macaulay (RelationalEmpirical-Sociological), Ian Macneil (Relational), Oliver W. Holmes (Classical), Richard Posner (Economics), Alan Schwartz (Economics), Robert Scott (Economics), Michael Trebilcock (Economics), Samuel Williston (Classical). The authors who immediately follow have also been heavily influenced by the theory of others or have formulated theories of their own (Calabresi, Feinman, Fried, Friedman, Goetz, Horwitz, Leff, Llewellyn, Williamson, etc.). Below them on this list, there are about 20 other scholars with more than 25 citations, the less theoretical among them being Robert Hillman, Robert Summers and Richard Speidel, who are of course not innocent of theory! The first three books cited are (in alphabetical order): Fried's Contract as Promise, Gilmore's The Death of Contract and Posner's Economic Analysis of Law . The treatises of Corbin and Williston follow. The first four articles are (in alphabetical order): Coase's The Problem of Social Cost, Epstein's Unconscionability, Fuller & Perdue's The Reliance Interest in Contract Damages (cf. Barnett 1995: 3) and Macaulay's Non-Contractual Relations in Business. Any comments are redundant. 7 In a broadly discussed and much-disputed essay, Judge Edwards accused contemporary American legal theory of being impractical and overly theoretical, thus neglecting the two important functions of the law school: to teach students the black-letter law and to train ethical practitioners. See relatively the reactions to his essay in the Symposium (1993), esp. Posner (1993) (even though much
The most typical example of this approach is American contract law, where the battle of the theories is worse than the battle of the forms (cf. Gordley 1991: 230 and Cheffins 1999: 202-206). However, in other Common law countries, the situation is not much different. For example, in England, theories like classical bargain theory and doctrines like privity are often so rigidly applied that they defy even common sense itself (see generally Collins 8 1993; 1999). On the other hand, contract scholars in Civil law countries adopt a very different approach (see generally Merryman 1990). The great majority of studies are purely doctrinal, there are very few references to philosophical, economic or other theories (and when there are, they are largely outdated) and the topics are extremely restricted, since the discussion on many issues seems to have come to a conclusion and the interpretation of the statutes 9 appears to be exhausted. With the exception of certain new issues of some interest, like collective bargaining agreements, standard form contracts and electronic commerce, the rest of the law review articles are analogous to their counterparts in the lowranking American law reviews and the specialized ABA journals. Why is there such a marked difference? What is the reason for this almost total absence of theoretical discussion on contract
of the scholarly output is trivial and ephemeral, this is the unavoidable price of a body of creative scholarship that has more practical relevance and value as theory compared to the doctrinal formalistic scholarship). 8 In the major English and Canadian law journals, there is also an ongoing lively theoretical debate. See also the contents of the Australian Journal of Contract Law , the only specialized journal in the field. See particularly Cheffins (1999: passim, esp. 200-202). 9 This is also true of treatises. The new editions do not contain any significant changes. They usually have just more cases to report (supporting a particular interpretation) and new law review articles to cite, or a more detailed treatment of new developments to include.
law in Civil law countries? How can we account for such stagnation when there is such intellectual orgasm in the Common law? Are theoretical problems considered resolved in continental Europe? Is there an indifference towards theory and a predilection towards results in the Civil law countries, or is it just technical conservatism? Or is civil contract law dead? Killed not by its two implacable enemies, torts and restitution, but by its own children (commercial law, labor law, corporate law, insurance law, antitrust law, consumer protection law, law of sales, etc.) that have grown immensely by eating the flesh of their father? II. All of the above are more or less true. Contract law in Civil law countries is not what it used to be. However, it remains the core of any Civil code (jus commune), the model of most legal relationships and of course the basis of the Law of Obligations (and, in some jurisdictions, of the General Principles of Civil Law). In addition, it seems that a renaissance of contract law has occurred
10 To be fair, there is some theoretical discussion on contract law; however, it is rather occasional and restricted to the journals specializing in legal theory and philosophy of law and is usually undertaken by the scholars who have the relative tenure (professors of philosophy or sociology of law). Their debate concerns mainly themselves, since the overwhelming majority of legal scholars do not take part in this dialogue, because they consider Justice or Fairness as separate from positive law and they regard philosophy of law as distinct from the law's dogmatic elaboration. This is a result of the increasing specialization and segregation within Civil law scholarship. Professors of philosophy of law cannot teach contracts (or vice versa) and they are usually supposed to occupy themselves with the great philosophical problems (what is law?) rather than with the application of legal theory towards solving particular doctrinal problems that are considered to lie within the territory of doctrinal scholars. In turn, doctrinalists, occupied with the practical problems of interpretation, see the broader philosophical discussion as irrelevant, if not completely worthless (for similar observations but different conclusions, see Gordley 1991). Thus, leafing through the various specialized and general Civil law reviews, one can find references, presentations, even critiques of particular theories developed in the United States or elsewhere, but there is little chance of seeing such discussions in the context of particular legal questions (of course, with a few exceptions). The situation has slowly started to change after the emergence of Law & Economics in Europe and the challenges it has posed to mainstream scholarship.
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in the last decade, for two reasons: (a) the triumph of the free market and capitalism in Europe-at-large which led, in Eastern Europe, to a drafting or revision of civil codes (esp. contract and property law) that are better-suited for free market economies and more conducive to economic development (Ostas 1992; Ostas & Leete 1995 and Rubin 1994; 1997; cf. Atiyah 1995: 27-34), and (b) the growing concern of the European Union for the unification of European private law in general and contract law in particular, as well as the trend toward the internationalization of contract law (Farnsworth 11 1990: 227-230). Therefore, European contract law is not dead. It is wounded, but alive and it seems that it has a good chance of recovery. However, the continuing absence of general theories developed in Europe or influenced by the ones developed in Common law domains seems puzzling for Common law scholars, until they realize what the most plausible explanation of this phenomenon is: in Civil law there is no need for theories since the legislator, mainly through the codes, has proclaimed what the law should be and the judge is (supposedly) a mere interpreter, useful only for accommodating trivial twists of facts. In such a static universe, where is the need for theory?
11 See esp. Lando & Beale (1995), Hondius (1989; 1994a; 1994b), Hartkamp et al. (1994), Hartkamp (1998), as well as the papers in the Symposium (1997). For international developments towards unification, see also Kozyris (1989), Viscasillas (1996), Honka (1996) and the Symposium (1995) on The UNIDROIT Principles of International Commercial Contracts and Hartkamp (1994) for a comparison of the UNIDROIT and European law principles of contract law with CISG. See also Ruston & Works (1980), Bennett (1980), Williams (1986) and Lando (1987) on the 1980 European Community Convention on the Law Applicable to Contractual Obligations. But see the pessimistic remarks by Horlacher (1994). More generally, on the problem of the unification of national laws, see Gazes (1997: 41-67, esp. 59 n.109). Sykes (1999) is also a skeptic concerning regulatory harmonization, preferring a legal system that tolerates regulatory differences subject to legal constraints, and that relies on mutual recognition where appropriate.
By contrast, in Common law, theory is necessary even today, since there are no Codes (capable of offering not only solutions to particular problems, but also -and most significantly- a unified approach). The need for theories has evolved in Common law (esp. at the end of the 19th century) in order to provide a sense of security to the contracting parties who did not place any trust in the caprices of individual judges and were looking for a more objective basis for their economic relationships (see generally Atiyah 1979). Common law has for centuries been (and today continues to be) in the process of its formation and Common law judges have tried to resolve issues by borrowing ideas, rules, and even theories, from multiple sources (Roman law, Civil law, law merchant, Canon 12 law, etc.). With the advent of the industrial revolution and the pressure applied by novel commercial relations, and society in general, judges and scholars increasingly felt the need to inject the law with a theory that would provide a sense of stability and security to the contracting parties. The classical bargain theory that developed and flourished in the 19th century was then considered (given the socio-economic conditions and the prevalent ideology of the 13 time) the perfect theory for a capitalist economy.
12 Despite the maxim (in Latin!) nolumus Angliae leges mutare. Above all, see the prodigious work by Gordley (1990 and 1991) and also, for England, Nicholas (1974), Simpson (1975b), de Zullieta & Stein (1990), Donahue (1992) and Seipp (1993). For the United States, see Helmholz (1992), Hoeflich (1992), Whitman (1987), Riesenfield (1989) and Joerges (1994). See also, more generally, Helmholz (1990), Stein (1992) and Reimann (1993). The influence of Civil law touches even upon Australian Common law (Ladbury & Paterson 1997). In Greek bibliography, see Zepos (1937), but also Gazes (1997: 32-33, with citations to opposing views). 13 For this era, see generally (among others) Lindley (1993), esp. on the impact of economic change on contract law (id. 13-25 and 281-295) (a capital-intensive economy inevitably produces large concentrations of economic power that threaten contract's social utility).
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A typical characteristic of Common law theories, that is also a good illustration of our point, is the desperate attempt of Common law scholars to prove that their theories and their approaches are not only better normative theories, but also perfect positive ones (Ulen 1996: 793). As a result, a rather strange phenomenon occurs in Common contract law review articles: after the exposition of a theoretical framework, the rebuttal of opposite theories and the discussion of several cases which are characteristic for their compatibility with the theory expounded, the author examines a number of controversial cases with the purpose of demonstrating that, deep down, these irregular cases are compatible with his 14 theory, despite the opposite wording or even outcome. Only in extreme cases is a decision characterized as forthright wrong or (at least) opposed to the theory developed, and is consequently dismissed. Of course, another scholar may easily support a theory that is in diametric contradiction, and may interpret the de15 cisions accordingly. This need for an approval by the already adjudicated cases (!) signifies the insecurity and the desperate need for coherency in Common law and is telling of the definitive power 16 of precedent even today. This phenomenon of procrusteanism in Common law theory leads, according to one of the leading legal
14 For a typical example (in otherwise excellent studies), see Yorio & Thel's (1991) general approach or Remington's (1999: 646) ambitious approach to the tort of interference: No hint of this approach is to be found in judicial opinions; yet it does such a remarkable job of explaining the outcomes of cases that one can only suspect that it comes closer to describing the intuitions of judges than the judges' own explanations of what they are doing. [the emphasis is ours]. 15 See e.g. Hillman (1997: 60-74) and compare with Yorio & Thel (1991). A characteristic historical example of this problem is the famous scene between Samuel Williston and Arthur Corbin in a session of the first Restatement drafting committee, as described by Gilmore (1974: 62-63). See also the excellent observations in Weir (1992). 16 For recent critiques of the Common law process, see Ulen (1996: 805-806) and Hillman (1997: 164-166); see also Gazes (1997: 33-34).
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historians and Common law scholars, A.W.B. Simpson, to a sort of 17 doctrinal monism: [T]here has always in the common law been a tendency towards a sort of doctrinal monism -there must be one test for the formation of contract (offer and acceptance), one principle governing possession, one test for the action-ability of promises. (Simpson 1975a: 325). 1.2. The Efficiency of Roman Law and of Contemporary Civil Contract Law I. In stark contrast with Common law's century-long struggle for coherency, Roman law in continental Europe was so compre18 hensive, successful, coherent (esp. after its elaboration by the Pandectist school--see generally Whitman 1990, Coing 1989 and 19 also Gazes 1995) and abstract, as to offer judges useful guidelines for the regulation of economic activities with no serious conflicts 20 21 with the needs of economic life, despite the age of the statutes. It
17 Monotheorism for Weir (1992). 18 Most Roman institutions related to the law of obligations are still alive in all major European codifications. It is characteristic that the contemporary law of sales in the continental legal systems is nearly identical to Roman law. For the reasons behind the success of Roman law, see generally Gazes (1995, esp. 1929) and the citations therein. 19 Before the Pandectists, numerous scholars had elaborated on Roman law. In Western Europe, Roman law was developed by the 12th-century Glossators, the 14th and 15th centuries Commentators, led by Bartolus and Baldus, the 16thcentury Humanists led by Hugo Donellus, the late Scholastic, Spanish natural law school and the early modern Romanists (see generally Watson 1981; Gordley 1990 and 1991, as well as Stein 1993) and in Southeastern Europe, by a host of eminent Byzantine scholars for over a thousand years (see generally Pantazopoulos 1974i: 199-294; 1979ii: 79-167; 1979iii: 90-195 and Troianos 1999). 20 According to Phourkiotes (1964: 30, n.1), Roman lawyers were particularly interested in the relationship between law and economy and the consequences of legal rules on economic life. Thus, the Roman Praetors and other Roman lawyers were often more interested in the efficient regulation of commercial relations than in developing a conceptual or moral system.
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is characteristic that the history of contract theory developed by Common law within the last two centuries was, to a great extent, the history of the adoption and development of concepts that were part of Civil law's contract theory and practice since Roman times (or at least since the major codifications in Western Europe). The codification of Roman law by Justinian and the subsequent development of this law (see Watson 1981 and Stein 1993), always within the boundaries of the great codifications, and, at the same time, the successful and uninterrupted application of Civil law in continental Europe and elsewhere, has offered the contracting parties in Civil law countries a stable, coherent and positive legal framework, including a set of default rules that they can bargain around (and thus further develop) (cf. Mattei 1997: 207-208). Its usage has also created a tradition of a particularistic elaboration of issues and economic relations, which is based not on a case-by-case treatment, that needs a general theory in order to remain stable and coherent, but on a regulation of special types or 22 categories of contractual relationships by means of a unified set of rules imprinted in the Civil codes. These rules have for centuries been the object of further treatment, elaboration and improvement by judges, scholars, and of course, the contracting parties themselves. This fermentation process has shaped legal orders that are time-honored and thus highly sophisticated. Therefore, it is no coincidence that Roman law was a decisive factor for the creation of
21 James Whitman has developed a theory according to which this compatibility was to a great extent helped in the 19th century by the theoretical constructs of a number of German professors of liberal political ideology, mainly of Jhering. See Whitman (1990: passim and also 229-243). See also Rolland (1990: 143-145). 22 Alan Watson describes Roman law as comprised of numerous self-contained blocks (Watson 1981: 18-20).
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the first commercial societies in Europe and for the rise of capital23 ism. It is illustrative of the contribution of Roman law to the economic development and the modernization of European legal systems that the enemies of Roman law in Germany attacked it as a 24 law that was rationalistic, commercial and materialistic (see Whitman 1994: 228). In a series of papers and books, Prof. James Whitman has established the close relation between the reemergence of Roman law and the birth of the first commercial society in Holland. Its moral menace feature proved quite useful in the battle of commercial needs with the prevalent native Christian law, that was unsuitable for commercial development. According to Whitman, Roman law did not cause the rise of a new commercial morality in seventeenth-century Holland; it helped justify the rise
23 For the relation of Roman law with commerce and its contribution to the creation of the first commercial societies, see Whitman (1994 and 1996). Roman economy was essentially a market economy. According to Wacke (1993: 2): The ground rule of the Roman emperors with regard to private economic activity may be described (in line with Rostovtzeff and Heichelheim, the Classicists of ancient economic and social history) as laissez-faire liberalism, which only sought to regulate to a limited extent the production of mainly agrarian and household goods, as well as their distribution on the predominantly small-scale markets [...] The marketeconomy principle of free competition remained, by and large, undisturbed by these state activities, which were important, but which remained peripheral to the general economic system. As a result, its ius civile (as well as its ius gentium for its subjects) was developed in order to meet commercial needs and to regulate an advanced commercial society and transactions (see e.g. Gazes 1995: 19; above n.19). See also the interesting concurring comments by Phourkiotes (1964: 2) and the citations therein. 24 Watson (1981: 23) adopts Max Weber's logically formal rationality to describe the rationalistic character of Roman law. For Trubek (1972: 730; also cited by Watson), logically formal rationality operates through a highly logical systemization, making the resolution of specific problems depend on processes of specialized deductive logic proceeding from previously established rules or principles.
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of a new commercial morality (Whitman 1996: 1845; see also Ko25 schaker 1938). II. The major codifications that started in the beginning of the 19th century and ended in the early 20th century offered a mod26 ernized version of Roman law, especially under the sway of the German historical school (whose influence was greater than gener27 ally believed and which effectively connected law in books with law in action in the Continent). These codifications rendered the law more compatible, in certain respects, with the economic developments of the period. Further, they were the product of an extensive theoretical discussion and were greatly influenced by the social and economic theories that prevailed at the time, which were not very different from the present mainstream ones (Whitman 1994). 28 Following the tradition of Roman law, the new Civil Codes have not espoused any particular theory, especially in the area of Contract Law (with the exception of a modified will theory for
25 For a similar conflict that took place in Greece between the German-educated proponents of Roman law (as taught by the Pandectists) and the advocates of the historical school who supported the preservation of the popular native Greek customary law, see Pantazopoulos (1945). 26 See mainly Zimmermann (1990). However, see Stein (1992: 1591-1594): The Roman law of the classical period, the first two centuries A.D. when it reached its highest point of technical development, is in many respects closer in character to the common law than it is to modern civil-law systems that are derived from Roman law. See also Stein (1993: 14). This is, to a certain extent, true, as Stein aptly demonstrates. But this similarity between classical Roman law and modern Common law is rather an indication of the immaturity of the latter than a sign of the deviation of Civil law from its historical roots. See e.g. Gazes (1997: 33, n.30). See also Zepos (1937, esp. 473-474). This does not mean that the progress of Civil law since Roman times has consistently been an improvement process. See esp. Stein (1992: 1600-1601). 27 See Whitman (1990: 200-228), Joerges (1994), Ruckert (1989), Klenner (1989) and also Ascheri (1996) and Gazes (1995: 34-35). The influence of the historical school on the drafting of the German Civil Code was also definitive for other European legal systems. 28 For Dawson (1982: 596), problem solving rather than high-level speculation was the great skill of Roman jurists (as this is evident in the Digesta).
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contract formation, that was essentially an idealistic/liberal cover for the actually dominant objective theory of consent, itself a later development, but under the influence of Roman law's general ap29 proach). The main concern for the codifiers was to solve all major 30 theoretical and practical problems by choosing the best possible solution for the welfare of the parties (see Ktz 1983), as this welfare was perceived under the liberal ideology of the day, which was also heavily influenced by Christian ethics (esp. equity), and certainly within the boundaries set by the rules, standards and principles that had proven successful for many centuries. Consequently, in the Civil Codes one can find answers to almost all the doctrinal and theoretical problems which have preoccupied and still preoccupy Common law theory (e.g. the basis of contract, the rigidity of the privity doctrine, the enforcement of penal clauses, liquidated damages or third-party beneficiary contracts, the choice between different types of damages and specific performance, the problem of quasi contracts and unjust enrichment, the puzzle of precontractual liability, the controversial unconscionability defense, the nature of the good faith requirement, the compensation paradox, the differentiation between commercial impracticability with other similar cases of frustrations of contract, etc.). Civil law thus provided definitive and authoritative solutions
29 For the theory of consent as the covert basis of contractual obligation in Greek contract law, see Hatzis (1999a: 134-169). 30 Roman lawyers cared little for the sweep of general principle. Theirs was a nominalist world of particulars, principally particular types of transactions [...] The Romans eschewed any effort at system or wide-ranging organizational principle. This left them at something of a loss when questions arose as to why certain rules had the content they did. Little in Roman law was explained by reference to something more abstract, something underlying the play of the rules. The only response was That is the way we do things. [Patterson 1991: 1433, the emphasis is mine]. See also Gazes (1995: 23): [Romans] [u]sed concepts, solutions and institutions only for practical needs and never for theoretical purposes. See, however, a different approach by Watson (1981: 83-84).
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to all the aforementioned problems, but without restricting the parties by heavily regulating their contract. In addition, most of the clauses in Civil Law Codes (esp. in the Law of Obligations books) are default, non-mandatory (optional) rules. The Codes routinely endow the judges with broad discretion by way of a series of general standards (see e.g. recently Hartkamp 1992). Regardless of the practice of Civil law judges, their independence is not similar in nature to that of their Common law colleagues, since they need not be creators but interpreters of 31 the law. Consequently, there is no urgent need for unifying theories resembling those that were developed in Common law, since Civil law judges are not expected to create law in the manner required of Common law judges. This particularistic approach of Civil Law has proven quite successful for a long time, if we judge by the absence of major intellectual controversies among Civil law scholars (at least in the area of contract law), similar to those taking place in Common law. Since this is a phenomenon common to nearly all European Civil law systems, we could safely say that it is not the outcome of a consensus based on intellectual laziness, conservatism or ignorance, but the result of (a) the lack of major doctrinal problems created by the rise and fall of opposing philosophical paradigms, (b) a parallel absence of major economic or social distortions created by the application of rigid legal theories, and finally (c) a shared common-sense pragmatism (a Roman law legacy) that has guided inter32 pretation as a technical skeleton key.
31 See however Zepos 1967: 931, for the creative and law-creating efforts of the Greek judge. See also below under 2.2.IIb. 32 See characteristically the views of Ernst Cohn, a London barrister practicing in both Germany and England, who wrote: A practitioner who has grasped the rules of the first book of the German Civil Code and those of the first part of the second book is thereby alone well equipped to deal satisfactorily with an astonishingly large number of everyday problems. A question which would require a
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An indication of the superiority of Civil law, especially in the field of contracts, is that over the last two centuries, as we implied earlier, Common law has incessantly copied the institutions 33 of Civil law. However, even today, Common law and Civil law have many dissimilarities in the field of contract law. These should not be exaggerated, since the similarities between them are numer34 ous and more important, given the tendency of Common law to borrow solutions from Civil law (but see Mattei 1994a: 199). Nevertheless, it would be interesting to explore the differences in the light of economic analysis, in order to test the success of both systems. Which system of law is more efficient in those areas where such differences exist? III. We have elsewhere (Hatzis 1999a; 2000b, 2002b) explored five areas where there are marked differences between Civil and Common law. These areas are contract formation, the enforcement of liquidated damages and penal clauses, third party beneficiaries, frustration of performance and efficient breach. We used American contract law and Greek contract law as typical examples for our study. American law is the most important Common law
common law practitioner to search in books of reference for one or several quarters of an hour could be solved by his Continental colleague completely satisfactorily in as many minutes. (Cohn 1960: 586). Similarly, in a recent letter to the editor from a retired American lawyer living in France: French contracts tend to be extraordinarily short and simple by American standards [...] This is partly because parties to business contracts usually don't try to anticipate every situation that could conceivably arise but are content to abide by the Code Civil. (Himel 1997: 5). See also Pound (1942: 42). However, see Hatzis (1999a: 21-47 and 2000c). 33 E.g. [T]he influence [of the Napoleonic Code Civil] in England and the United States was far from superficial but reached deep and long lasting layers of the law (Mattei 1994a: 202). See also Schwartz (1956). 34 It is, however, becoming more and more obvious today that the prevailing idea of the English Common law as constituting an entirely autochthonous achievement is a myth. For in reality, England was never entirely cut off from continental legal culture. (Zimmermann 1994: 220). See generally, Zepos (1937), Merryman (1981), Bell (1995) and Mattei (1997: 77-81); see also Watson (1990: 248).
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system in the world and Greek law is one of the most typical Ger35 man-influenced legal systems rooted in Roman law. As our research showed, the solution provided by the Civil law systems in these five areas where major differences are observed, is more congenial to the one advocated by economists as 36 the most efficient one. The particularistic (casuistic) and pragmatic approach of the Roman and Civil law (Zimmermann 1990: 37 921) has proven to be more efficient than that of the rigid theoretical Common law, whose reluctance to adopt all the successful solutions given by the Civil law (although it has already adopted 38 most of them) is primarily due to the futile attempt of Common
35 The Greek Civil Code took effect in 1946 and was drafted during the 1930s by scholars who were greatly influenced by German law. From 1821 when Greece was liberated from the Ottoman yoke until 1946, Byzantine law (essentially the Corpus Iuris Civilis) was the applicable Civil law with few major modifications by special laws. See Zepos (1946), Maridakes (1959), Watson (1991: 87-88), Zweigert & Ktz (1992: 161), Yiannopoulos (1996) and Hatzis (1999a: 1-21). 36 See generally Hatzis (1993) for the applicability of positive economic theory and even of the normative function of the wealth-maximization principle in Civil law countries. See also Mattei (1997: 179-199). However, the prevalent theory in law & economics maintains that the Common law process is the primary reason for the generation of efficient rules. See characteristically Rubin (1977; also 1994: 9-11) and the work of Richard Posner in general, mainly his treatise Economic Analysis of Law (Posner 1998b; also 1980). For a contrary view, see Backhaus (1989). For the official Chicago school statements of the efficiency of tort law, see Landes & Posner (1987), and of corporate law, see Easterbrook & Fischel (1989), as well as Ribstein (1999). 37 Of course, the terms are relevant and they are applicable only in the context of the relationship between Civil and Common law. But see Georgakopoulos (1997, esp. 485-487). 38 American law could not resist the allure of codification. The Uniform Commercial Code is the prime example. Karl Llewellyn, the U.C.C.'s main author (and a great enthusiast of the Common law process) believed (in a New Deal spirit) that commercial law rules are best created by administrative agencies or specialized law reform organizations (Schwartz 1997: 12, 22-27). He also maintained that the rules of contract law should come at least in part from outside the Common law system in order for them to be efficient (Schwartz 1997: 31). Cf. Shavell (1987: 277-290). Restatements have also started to assume the role of
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law scholars to create unified theories, based not on economic effi39 ciency (the real and primary purpose of contract law), but on philosophical and moral ideals that are irrelevant to the parties' wishes and welfare. This does not signify that Civil Law's underlying logic is economic (a feature that Judge Posner and other law & economics scholars attribute to Common Law). But it does make the point that the long process from Roman Law times to the modern Civil Codes which we have briefly described above, and the parallel testing of its rules by a host of legal scholars, judges and lay people in diverse social and economic settings, have shaped institutions 40 that regulate the market efficiently. Nevertheless, we will show that today even Civil law needs a theory. Using Greece as an example, we will discuss the attempts of mainstream scholars to cope with its absence and will explore the reasons for their failure to satisfy the aims of contract law, suggesting that the most appropriate theory is an economic theory for
codes or statutes (Barnett 1996: 528): Courts are increasingly treating the Restatement as a statute. Judges typically look to the Restatement, rather than to even very practical and accessible legal scholarship, to ascertain the prevailing contract doctrine. They are unwilling to move beyond the safe-haven framework it provides. More generally, see Calabresi (1982). 39 For the definition of efficiency, we employ the Kaldor-Hicks criterion of wealth maximization. For a policy to be Kaldor-Hicks efficient, those individuals made better off by a new policy or change of policy, would have to be made sufficiently better off that they could compensate those who are made worse off, the compensation being potential and not actual (Harrison 1995: 34). See Kaldor (1939) and Hicks (1939) and also Posner (1992: 13-16). More generally on efficiency concepts, see Murphy & Coleman (1990: 182-187). 40 Of course, this does not imply that countries with civil law systems are wealthier or more efficiency-oriented than common law countries. The evidence signifies that rather the opposite is true. See esp. Mahoney (2000) (common law countries experienced faster economic growth than civil law countries during the period 1960-1992; the difference reflects the common law's greater orientation toward private economic activity and the civil law's greater orientation toward government intervention). However, we believe that this disparity should rather be attributed to different cultural traditions and historical circumstances. See below under 2.2.II.c.
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contract law, based on the currently mainstream neoclassical economics.
2. Economic Analysis for a Civil Contract Law 2.1. From the Absence of Theory to the Neoclassical Consensus As we emphasized in the first part of this paper, the European Civil Codes have proven overall successful after many decades of constructive implementation. Their particularistic approach towards contract law and the absence of rigidity contributed to the facilitation of economic life and to the realization of the parties' wishes more successfully compared to Common law. This was the result of a natural evolution of legal rules and practices that threw into disuse a number of worthless institutions and insignificant 41 formalities. It was also the result of the judges' respect for the principle of freedom of contracts and the absence of an active judi42 ciary, similar to the one in the United States. However, the essential devotion of legal scholars to the spirit of equality, which is inherent in the freedom of contracts principle, inevitably raised concerns about genuine consent, about the substance of the contract and consequently about the conditions required for the autonomous will to be freely and voluntarily expressed through contract (thus bringing about just but also truly efficient results). Civil law scholars have increasingly focused on
41 This process was precipitated by the struggle between the historical school and Roman law, a struggle that resulted in the creation of a legal spontaneous order, purified by the rationality of Roman law. See generally Klenner (1989). 42 As we implied earlier, Civil law judges are active in developing the law, not changing it. And they are always free from precedent. For relevant remarks, see generally Gordley (1981), Alivizatos (1995: 578-580) and Posner (1996c: 6061).
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the problem of inequality of bargaining power in a contractual relationship and of informational asymmetries (sometimes even the protection of risk averse persons). This intellectual process has led to theorizing that bears many similarities to the one undertaken by 43 American neoclassical contract law scholarship. Therefore, we could characterize e.g. mainstream Greek contract theory as similar in many respects to the American neoclassical school of contract scholars. This movement from freedom to control is clearly evidenced in Greek contract law, as this has been constructed by contemporary interpretation (Hatzis 1999a: 21-64). According to Alan Schwartz (1986), this trend has changed the face of contract law: Through such doctrines as unconscionability, contract law today is attempting to perform its traditional function of insuring justice in the marketplace, not by permitting people to do what they want to do, but by preventing them -in certain circumstances- from doing what they have agreed to do. (Schwartz 1986: 108). Schwartz successfully identifies the confusion plaguing American (and for that matter Greek) neoclassical legal scholarship. Legal scholars cannot easily discern the real nature of the problem. The
43 For an account of this development in American contract law, see Slawson (1996). See Hellner (1991) for a similar movement initiated in the context of the Scandinavian legal realist school. See also Hillman (1997) and Sharma (1999), and in Greek, the very good historical introduction to the rise and decline of contract (spanning the period from ancient Greek law to Gilmore and Atiyah) by Velissaropoulou-Karakosta (1993). See also Macneil (1978) for an earlier and valuable delineation. For an early (both chronologically and scientifically) and thus primitive attempt by Karl Llewellyn to apply economic analysis to the regulation of contracts (within the boundaries of early economic neoclassicism), see Schwartz (1997). Analogous attempts by Greek scholars and judges to use economic analysis are also doomed to failure for similar reasons, that is, for lack of economic sophistication (see mainly Hatzis 2000c; cf. Schwartz 1997: 4849). For Germany, see Pieck (1996) and for European law in general, see Brownsword et al. (1994).
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critique towards the freedom of contract principle by Greek legal scholars aims mainly at three targets: (a) the problems created by the initial inequality of bargaining power between contracting parties, (b) the problems created by the subsequent inequality of bargaining power (due to the sequential character of economic activityperformance), and (c) the distributive consequences of contract law in general (see generally Papanikolaou 1991: 183-245). For Greek legal scholars, the three aforementioned targets are one and the same: the free market mechanism (as it is supported by contract law rules and especially by the freedom of contracts principle in a society of inequality), that purportedly has devastating distributional consequences for the weaker parties in transactions, since there is no perfect competition and the stronger contractual parties can easily impose the terms that are more favorable to 44 them. However, this approach does not seem to differentiate between the two essentially different aspects of the market mecha45 nism, i.e. its distributive consequences and its inefficiencies. Regardless of the distributional problems and the social consequences of (even perfect) competition, contract law deals (and it should exclusively deal) with problems created by free market failures, that is, by inefficient markets. But for most Greek (and European) legal scholars, contract law can be used both as an instrument for correcting market failures and as an instrument of social justice (Stathopoulos 1999). We believe that this view is not only erroneous, but also dangerous.
44 See Hatzis (1999a: 34-38) for a more detailed presentation and many citations to contemporary Greek legal bibliography. 45 This does not imply that market failures do not have distributive consequences. However, the distributive consequences of perfect and imperfect competition are very different from a qualitative point of view, even for political philosophers. See Rawls (1971) and Nozick (1974) for the definitive treatment of the problem in liberal and libertarian political philosophy. See also Hatzis (1997).
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2.2. The Application of Economic Analysis to Greek Contract Law: Problems and Considerations In this paper, we are only interested in the first function of contract law (in how it deals with market failures), since contract law is ill suited for the second function, as we will argue in the next section. We contend that the economic theory of contracts, as this has been developed by the proponents of economic analysis of law 46 over the past twenty-five years, provides the best general theory and analytical tools for the interpretation of Greek contract law 47 (and any other Civil contract law, for that matter). Virtually all the principles of Greek contract law can be restated in economic terms (Posner 1990a: 361 and esp. Harris & Veljanovski 1986), without losing their normative implications (see e.g. Cooter & Ulen 2000: 205-212). Hence, an economic analysis of Greek contract law could be successful for many reasons. Some of them are the following:
46 Mainly by lawyers, since for most economists, the concepts of contract law were terra incognita and were considered the given institutional framework. See Veljanovski (1979 and 1982: 76-77) and also Romani (1986: 121-125). Even today, economists are more interested in contracts theory as part of the theory of the firm analysis in industrial organization (Salani 1997), and/or as one of the methods of economic organization (the other two being regulation and vertical integration) than in the economic analysis of contract law as a collaborative effort by lawyers and economists to design efficient default legal rules and regulations (mandatory rules or rules of public policy in legal terminology) that should govern contractual relations. See characteristically Coase (in Kitch 1983: 192): I have no interest in lawyers or legal education [...] My interest is in economics, Coase (1988) and the critique towards the mainstream new law & economics by Williamson (1996). See also Kronman & Posner (1979: 6, n.6 and also 1979: 7: we were struck by the paucity of economic writings on contracts.). 47 See e.g. Mattei & Pardolesi (1991) and Ostas & Leete (1995). Based on similar arguments, Reinhard Zimmermann advocates a unified approach that uses the common past as the most obvious, and natural, point of reference for analyzing and understanding the development of modern law (Zimmermann 1994: 222), an approach reminiscent of the historical school.
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I. Contract law is a body of rules created and developed in order to help the market function efficiently (by regulating exchanges), and to act as a prerequisite for the very existence of a market suited to the needs of more developed societies - i.e. as an 48 institutional framework. The economic role of contract law (its fundamental purpose) is to facilitate transactions, to help parties achieve their private ends (thus creating value through exchange), and to encourage rational planning by the parties. The enforcement of promises helps people achieve their private ends by enabling them to rely upon each other and thus to coordinate their actions. In this manner, the law of contracts provides a framework within which private citizens set the terms of voluntary associations with each other, hence creating a sphere of private governance. A theory of contract law should facilitate this pursuit of private ends through voluntary agreements (Cooter & Ulen 2000: 184-189; see also Posner 1990b: 93-94 and Epstein 1997: 33). If we view economics as the study of the general methods 49 by which men co-operate to meet their material needs, then it goes without saying that the findings of economic analysis are valuable for the study of contract law as a human invention that facilitates the meeting of material needs by men and women. 50 Contract law and microeconomics thus have the same subject mat-
48 See Kronman & Posner (1979: 1), Stephen (1988: 155), Murphy & Coleman (1990: 162), Harrison (1995: 90-93), Hirsch (1999: 105-108), etc. For a slightly different version of the role of contract law, see Craswell (1995). For Craswell [m]ost of contract law consists of default rules, or rules that apply when parties fail to address a topic one way or the other in their contracts. In this view, the economic exchanges by the parties are, in essence, privately regulated and contract law plays merely an auxiliary role and not the role of general framework. This approach seems quite germane to the relational theory of contract (see Macneil 1978). See, however, Legrand (1988). 49 The famous definition belongs to Sir William Beveridge. We could use a less ambitious definition and still have the same results. 50 Informed, of course, by game theory. See esp. Baird et al. (1994).
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ter: market transactions as cooperation mechanisms - that is, exchange. Consequently, their collaboration is imperative for societies 52 as complex as ours, especially in their market element. Accordingly, the problems of contract law are certainly legal problems, but they are first and foremost economic problems. This is not the place to argue for the relevance of contract law to economic life in general or to support the more debatable assumption that economic considerations are far more important than the regard for the integrity of any legal theory or idea in an area that is so deeply interwoven with economic life. No one would deny that a legal theory is tested to a great degree by its application within a particular society; in our case, a theory of contracts is tested in the market. II. Although the economic theory of contracts has been de53 signed for Common law systems, there is sufficient evidence of its
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51 Since buying and selling -and related transactions, such as leasing and borrowing, which are also governed by contract law- are quintessentially economic activities, it would seem that economics should have something useful to say to students of contract law. (Kronman & Posner 1979: 1). In Greek legal bibliography, see the excellent discussion in Phourkiotes (1964: 5-6, 26-36, esp. 32). 52 The primary role of economic analysis is to explore the efficiency of the existing (optional) default and mandatory rules and to propose new ones in cases of inefficiency. Any other role that can be assumed as a basic element in a moral or political theory will not be discussed here. But see Posner (1980, 1983: 48115; 1990a: 353-392, 460; 1995a: 11-21, 403-404), for the most well known exposition of such a normative theory and the subsequent distancing from its controversial original version, as well as Hatzis (1993). 53 However, regardless of the now old-fashioned schism between Civil and Common law, American intellectual leadership in Western law will be decisive, also taking into consideration the pervasiveness of law and economics in American legal theory, as this is illustrated in the mainstream textbooks, treatises, casebooks, as well as citation studies. See esp. Mattei (1994a: 203-218), Landes & Posner (1993) and also Polinsky (1989: 148). For the dominance of the English language in legal science, see Gazes (1997: 65, n.126).
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relevance as a basis for the construction of similar theories for Civil 54 law systems. According to a recent statement of the goals of economic analysis by Judge Posner (1998a: 2-3): The economic analysis of law [...] has both positive (that is, descriptive) and normative aspects. It tries to explain and predict the behavior of participants in and persons regulated by the law. It also tries to improve law by pointing out respects in which existing or proposed laws have unintended or undesirable consequences, whether on economic efficiency, or the distribution of income and wealth, or other values. To sum up: (a) An economic theory of contracts could become a guide for the legislator who wishes to enact a statute that is as efficient as possible, given the restraints posed by the other normative objectives of the particular statute. And it could be a perfect tool for the legislator who aspires to create nothing more than an economically efficient contract law, leaving out the normative and distributive considerations to be dealt with by taxation, or any other kind of state legal and economic intervention. The transformation of the former socialist countries of Eastern Europe is a typical example, since one basic concern for the new democratic regimes is the con-
54 See e.g. Posner (1983: 101-102, 105-106). See the suggestions for an explanation of the implicit economic logic of Common law in Posner (1992: 254255). Almost all of them are valid for Civil law (esp. 1, 3, 4) and, as we have supported elsewhere, sometimes Civil law is conditioned by economic logic in circumstances where Common law is not (Hatzis 1994; 1997; 1999a; 2000b, 2002b). For views parallel to ours, see the arguments (although somewhat tentative) by Goldberg (1989: x), Van den Bergh (1988; 1992), Cooter & Ulen (2000: ix-x) and Posner (1997a). See also Hatzis (1993).
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struction of legal institutions and, more particularly, the creation of 55 a contract law suitable for a market economy. (b) In addition, we should here emphasize that judges play a very decisive role in Civil law systems, despite the mainstream 56 view in Common law typifying them as bureaucrats. Although judicial decisions do not constitute a source of law comparable to 57 statutory law, in practice they are considered de facto equivalent. In Greek legal scholarship, there is an ongoing controversy 58 surrounding the nature of judge-made legal rules and the relation of stare decisis to custom. According to Papantoniou (1983: 43), [t]oday the primary source for the creation of custom is the
55 See Ostas (1992), Ostas & Leete (1995), Brietzke (1994), Hay et al. (1996), Jiang (1996), Rubin (1994; 1997), Butler (1998), Posner (1996d; 1997b; 1998c) and Hatzis (1999b). See also generally Easterbrook (1989). 56 The prevalent view in the Common law world is that [t]raditionally the civil-law judge is a fungible person, one of a group of anonymous, almost colorless, individuals who hide their personality behind the collegiate responsibility of the court. Their duty is to apply the written law, and the meaning of that law is to be discovered from the writings of its academic exponents. (Stein 1992: 1597). Cf. Posner (1997a: 3-5). Although these remarks contain some elements of truth, they hardly do justice to the Civil law judge, especially in the case of higher judges (of appellate and supreme courts). See e.g. Alivizatos (1995) (over the past twenty years the judiciary in Western Europe has taken on an increasingly significant role in national decision making processes), but also Georgakopoulos (1999) for contrary views. 57 In Greek bibliography, see esp. the discussion in Papantoniou (1983: 45-49) and Papasteriou (1994: 27-31). 58 For the role of the judge in interpreting the Greek Civil Code and in legislating within statutory limits, see the discussion in Bales (1940), Maridakes (1949: 214-217) and recently Ap. Georgiades (1996: 131). In the original draft of the Book of the General Principles, there was a section (unfortunately later deleted) that read: The Judge, in cases where there is no relevant rule in the law or in the custom, decides (implementing the general principles of law) according to the rule which the legislator would have decreed if he could have foreseen the situation. See Draft of the General Principles, art. 1. Similarly, see Zimmermann's (1994: 220 xiii) comments on the BGB.
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binding precedent that courts follow faithfully. The persistence on judicial precedent, especially by Areios Pagos (Greece's Supreme Court for private law) and the major appellate courts, certifies the existence of opinio necessitatis, that is a basic requirement for the emergence of custom. If we take into consideration that under the mainstream view, a custom can modify or even revoke a statute under certain circumstances (Papantoniou 1983: 42 and esp. Vavouskos 1984: 44), we can fully grasp the extent of the (de facto) law-making power of judges in the Greek Civil law system, although this is in practice applied mainly in Areios Pagos and in 60 the major Courts of Appeal. However, Stathopoulos (1995: 23) disagrees with the equation of stare decisis with custom: In administering justice, [the 61 judge] implements the law, he does not legislate. And he goes on to develop Fr. Gny's view of court decisions as introducers of 62 custom: Only if any constant practice of courts creates a sense of a general binding rule (opinio juris) in the citizens is a rule of customary law generated. But the reason for the legal force of this rule, and therefore the source of production of law, is not the court decision, but the custom. [italics by the author]. Nonetheless, the aforementioned theory does not result in a curtailment of judicial discretionary authority and law-making power, since judges are always free to pursue their own interpretations. In
59 See also Papantoniou (1983: 45-46), and for concurrent views, Vavouskos (1984: 43-44) and Spyridakes (1985: 26). See also the opinion of Vathrakokoiles (1989: 22), a Judge in Areios Pagos (then an Appellate Judge). 60 See e.g. Grammatikake-Alexiou (1993: 15) and Stathopoulos (1996a: 135143, esp. 143) for examples from judicial practice. 61 Stathopoulos (1992: 40-41) is not much friendlier to customs, stating that they are often conservative, outdated, biased and irrational. See also Stathopoulos (1979: 2 for customs in the law of obligations). 62 See also Stathopoulos (1992: 48-49 and esp. 54-55).
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any case, the original intent of the legislator as a guideline for statutory interpretation does not have the same authority in Greece as it does in the United States (see e.g. Papantoniou 1983: 57). The mainstream objective theory of interpretation holds that the purpose of interpretation is the discovery of the essence of the law (or rather, of its ratio legis) and not the will of the legislator. The will of the legislator is superseded by the will of the enforcer of the law (Papantoniou 1983: 57). This is particularly true of Areios Pagos and the major Courts of Appeal that can easily create customary law via binding precedent, and do so regularly (see generally Papasteriou 1994: 27-31). Consequently, the characterization of a particular judicial practice as custom has little practical significance, because what ultimately matters is the verification that 63 the practice already exists and produces legal results. The single most important factor that determines the broad discretionary power of courts in Greece, and in the Civil law world 64 in general, is the existence of very general standards that leave the judge with a vast territory over which to exercise (even legislative) power. This is particularly true of contract law, where there are a great number of standards and concepts whose interpretation and
63 See Ap. Georgiades (1997: 25-26), who discusses the role of judicial precedent in the creation of law, and also Gazes (1997: 62-63, n.117) and even Stathopoulos (1992: 54), who characterizes the work of judges as one of shaping the law. For Papasteriou (1994: 28-29), there are three different ways in which a judge can shape the law: (a) the authoritative interpretation of legal rules that has an indisputably normative character, (b) the application of general standards and general legal concepts in particular cases, and (c) the filling-in of the gaps in the law with analogical reasoning (see also id. 104-105). See especially Litzeropoulos (1932); see also Papantoniou (1983: 45-46) and Georgakopoulos (1997: 476, n.4). An act that was decisive for the future of the relation between law and custom in Greece was the Royal Decree of February 23rd, 1835 (see Pantazopoulos 1945: 473-482) (a custom cannot revoke a written law expressing public policy). 64 See the divergent, conflicting views of Watt (1997) and Sales (1997) on French law. For France, see also the excellent study by Lasser (1995).
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application is decisive (Ap. Georgiades 1997: 24-25; for further analysis, see Alexandridou 1987-1988). 65 The numerous and important general standards in the Greek Civil Code rendered Greek Civil law a ius aequum and not strictum to such a degree that the Code was considered internationally 66 unique. However, the use of these standards by the judges should be based not on subjective criteria or personal opinions and views, but on the general principles of law as they are imprinted in the body of legislation (from the Constitution to the special laws) and the widely accepted and respected social norms (Stathopoulos 1992: 63-64; Papasteriou 1994: 8-9). The mainstream approach to standards in Greek legal scholarship could not find a better description than the one provided by Duxbury (1995: 259), writing on the American school of process jurisprudence: Standards are legal directives which entail a qualitative or moral appraisal of human behavior by reference to supposedly ideal behavior in a comparable 67 situation. Thus, judges can make the most of the high level of abstraction and use the wide discretionary authority created by the 68 standards, in order to employ a cost-benefit analysis in their deci69 sions.
65 According to Triantaphyllopoulos (1956: 227), there are eighteen such standards in the Greek Civil Code, for example good faith, trade usage, moral standards, social purpose and/or economic purpose, serious grounds, reasonable compensation, equitable criteria, etc. 66 See Stathopoulos (1992: 62-63, 65-66; 1996a: 135, 144-145; 1998: 9), Zepos (1946: 71), Papantoniou (1983: 46-50), Ap. Georgiades (1997: 45) and also Pantazopoulos (1974i: 177-191) for the history of the standards created by ancient Greek legal theory (equity, freedom of contracts, unjust enrichment, good faith and utility) and their influence on Roman law (Velissaropoulou-Karakosta 1993). 67 For the economic role of standards, see particularly Posner (1990a: 42-51), Kaplow (1992) and also Hillman (1997: 125-171). 68 According to Mantzoufas (1954: 21-22), the general standards were inserted by the drafters in order to open a window to economic reality. 69 This is not so unusual in Civil law judicial practice, even though costbenefit analysis is most often disguised as common sense or pragmatism (e.g.
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(c) The main obstacle to economic analysis in Civil law coun70 tries might be the absence of an intellectual tradition similar to that of Common law countries (i.e. a tradition of respect for indi71 vidualism and/or economic efficiency). One could point to certain readily identifiable cultural and historical reasons that have played an important (negative) role in the prevalence of a concept like 72 wealth-maximization. But we should not overestimate these culturally-specific conditions, especially after taking into consideration the trends in international economic relations, the globalization of economic activity (see esp. Gazes 1997: 48-54, 62, 64), the desee Papantoniou 1983: 55). See also Schwartz (1997: 12) for Llewellyn's concurrent views. The mainstream interpretation theory is teleological (instrumentalist), in the sense that it emphasizes the objective of the law as a manifestation of its meaning (Liakopoulos 1982: 117; Papantoniou 1983: 61-62; Stathopoulos 1992: 88 and especially Zepos 1955: 11). But see also the discussion in Gemtos (1999: 11-12). In the realm of contract law, Greek courts have been known to pursue different and quite contradictory objectives: efficiency and social justice (Papantoniou, id.). This contradiction (indeterminacy) is not unknown to American contract law, being the favorite target of scholars of the Critical Legal Studies school. See esp. Kennedy (1982). 70 The difficulties for the institutionalization of law and economics in Europe are well known, although the situation is rapidly beginning to turn around. See generally Mattei & Pardolesi (1991), Kirchner (1991) and the other articles in the Symposium (1991). See also Van den Bergh (1992) and Hatzis (2000a). Not surprisingly, the reaction against Law & Economics in Europe is identical with the one against the moral menace of Roman law. The account by Whitman (1996) will sound familiar to Law & Economics scholars. 71 Which in turn is based mainly on a utilitarian or pragmatic philosophical tradition. See generally Atiyah (1979) and recently Mattei (1997: 85-88). See also the remarks by Zepos (1937: 474-475) and Schwartz (1986: 107, n.1 and also 1997). For Greece, see generally Zepos (1978: 917), Meinardus (1991) and Kitromelides (1994). However, see the work of James Whitman (1990; 1994; 1996) on the materialistic, rationalistic and commerce-boosting character of Roman law. 72 We should not forget that wealth maximization as a judicial policy guide was ferociously attacked by the majority of legal scholars in the United States and by many economists, not because it is so harsh in and of itself, but because it sounds harsh, even when it is a pre-existing policy under a different name. But the truth is that it also found many adherents. See Hatzis (1993) for relevant citations and discussion.
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regulation influx and the discrediting of political theories that could 73 create a hostile environment for the growth of economic analysis. We dare suggest that a Civil law country has even better prospects for the application of such theories than a Common law country. Currently, in most Civil law countries (at least in 74 Europe), any attempt to deregulate economic life and to create an economically efficient law comes primarily from the state and not from the judicial system or the legal scholarship. Thus, the timing is perfect for the sophistication of contract law in these countries. Specifically, as concerns the European Union, the attempt to unify the private law of member states in recent years, the publication of tentative drafts (especially the Principles of European Contract Law, in Lando & Beale 1995) and the enactment of many directives on contracts issued by the EU, present a golden opportunity for modernization based on economic analysis (cf. Ap. Georgiades 1999: 7-8). III. An economic theory of contract law should construct legal rules that will accommodate -rather than interfere with- existing business practices (Hay et al. 1996). A corollary of this postulate is that the first principle of an economic theory of contracts should 75 be freedom of contracts.
73 It is characteristic that the two most distinguished professors of civil law at the University of Athens, Apostolos Georgiades (1997: 67-68) and Michael Stathopoulos (1998: 10-12), present economic analysis of law in their textbooks. Although both presentations are brief, and to a certain degree critical (esp. by Stacholoulos), the phenomenon can be characterized as nothing short of extraordinary, since it is the first time that a modern interdisciplinary theory is presented in a similar "mainstream" textbook and that the authors made no reference to any other grand theory. See further in Hatzis (2000a). See also Papasteriou (1994: 35-36). 74 Especially the countries that are current or prospective member-states of the European Union. 75 "[O]wnership" without the privilege of transferability is only a limited form of ownership (Goetz 1984: 38). For Posner (1995b: 266), [t]he important thing for capitalism may be the enforcement of freedom of contract by reasona-
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The great majority of contract theorists in Greece, and in continental Civil law countries in general, accept the basic principle 76 of freedom of contracts at least initially and with some qualifications. The reason is that this principle is not only a manifestation of freedom, but also of formal equality. Most of them support it (even in its curtailed versions) as an essential basis for the contract law of a market economy. All the restrictions they have imposed on this principle are based on the economic considerations of their proponents (although crudely articulated). The basic argument on the inequality of the bargaining power of the parties, as well as any other fairness consideration, is grounded on the ambition to provide the parties with the equality environment of perfect competition (e.g. Zepos 1955: 103; Papantoniou 1983: 261-262, etc., cf. Burrows 1995) and not to promote any specific distributive con77 cerns. Very few scholars would straightforwardly support a redis78 tributive function for contract law; on the other hand, most of them would arguably welcome an economic theory (e.g. Papasteriou 1994: 35-36; Ap. Georgiades 1997: 68; Stathopoulos 1998: 10-11) that could soothe their worries over the new economic reality created by the infamous inequality of bargaining power, which precludes the unrestrained enforcement of freedom of contracts (Clark 1989: 1726). Legal scholars and ambitious judges, with very limited knowledge of the functioning of a market econbly disinterested judges rather than the exact degree of clarity and coherence of the legal rules. 76 For Stathopoulos (1996b: 53), the principle of freedom of contracts is the soul of contract law. For similar views in Germany, see Rolland (1990). 77 See Gazes (1970: 41): The socialization of Civil law would be its adulteration. 78 At least in Greece, even radical scholars lack such an ambition. Their discourse (or rather especially that) includes economic arguments and a concern for the distortion of the market economy by market failures. See especially Kazakos (1987: 31-41). See more generally Kronman (1980), Posner (1992: 95, 97-98, 263-264) and Harrison (1995: 109-126).
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omy, share a basic weakness: They can observe the distortions of a market economy (the market failures), but they cannot understand their origins and consequently they cannot correct or deal with 79 them consistently (Ichino 1998: 310). They can feel the need for a 80 new coherent theory of contract law, but they cannot build one. IV. As we have previously noted, a typical characteristic of Greek Civil law theory (and more generally, of its European counterparts) is the absence of an underlying general theory (a grand theory). This is also a defining feature of Roman law and one could say that it is an indication of an effort to resolve all practical matters particularistically, and not with the use of grand theories. One could then wonder about the need for a theory, and especially for an economic theory, and about its place in a construct such as the Greek Civil code, that has preserved its intellectual 81 autonomy quite successfully until today. Some general reasons were already mentioned. To them, one could add the increasing complexity of economic and social relations that renders the economic illiteracy of legal scholars unacceptable for modern capitalist societies. The process of legal modernization can no longer be
79 He [Friedrich Kessler] viewed the courts as accomplices throughout, well meaning but naive, clinging by rote to tired doctrines of promise and assent, yielding to an instinct for justice in a confused manner and without regard to developing a coherent theory of contractual interpretation. (Priest 1995: 2146). See also Duxbury (1995: 144-145) for Llewellyn, as well as Gazes (1997: 6770). 80 See e.g. Stathopoulos (1995: 37-38, 43, 76; 1999). For concurring thoughts and similar examples taken from American law, see Schwartz (1997: 67), but also Mattei (1994b) (equity and efficiency are of equal use to lawyers as techniques of legal argument). 81 If we use as a criterion the fact that there has been no major or even minor revision (or proposal for revision) of the chapters regulating contractual relations. The only indirect revision was the implementation of the European Union directives. See generally Stathopoulos et al. (1995) and Karakostas (1997).
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based on the age-old, albeit successful evolution (and natural se82 lection) of legal rules. The economic theory that was developed expressly for Common law but was grounded on neoclassical economic theory 83 (which is international and not parochial), is not only a perfect intellectual vehicle for understanding the internal structure, the de84 velopment and the essence of the Greek Civil Code, but it can also provide the tools needed to modernize a construct that has the potential of becoming even more fitting to deal with economic rela85 tions. Today, these tools cannot be offered by legal scholarship in 86 the technical doctrinal sense, but by a legal science informed by 87 the social sciences in general and by economics in particular. Any attempts made by Greek legal scholars to place special emphasis on the problem of disparity in the bargaining power between the parties have failed because of their methodology. The intervention of the Judge in a contractual relationship is too sensi82 According to Mahoney (2000), recent finance scholarship finds that countries with legal systems based on common law provide better investor protections and have more developed financial markets than civil law countries. 83 See Mattei & Pardolesi (1991: 266); see also Mattei (1994a: 217-218) and Gemtos (1999: 12-13). 84 See similar remarks on the usefulness of economic analysis to the AngloAmerican Common law of contracts by Howard Gensler: A command of this economic theory not only illuminates contract law for the student by providing a powerful pedagogical paradigm, but is also invaluable for the attorney who must convince an appellate court of the policy implications and structural merit of an argument. (Gensler 1994: 384). 85 The great strength of law and economics [...] lies in its bringing to the study of the law a skill (deductive theorizing) that is complementary to the great inductive concern with facts and distinctions that characterize the best doctrinal scholarship. (Ulen 1996: 791, emphasis by the author). Ulen refers mainly to Common law, but his description fits Civil law perfectly. 86 This is so for many reasons, which cannot and need not be elaborated here. For a classic statement of the end of law's autonomy, see Posner (1987). 87 See Cooter (1995) for related views, but from another perspective (after the triumph of economic analysis of law in the U.S.A.), and Williamson (1996).
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tive a matter to be left to lawyers with no knowledge of economics (see esp. Phourkiotes 1964: 35-36); and this is so because this intervention is actually a form of government intervention in the 88 sphere of market activity. If this intervention is to be justified, especially today, it must be based on the sophisticated market failure analysis of modern microeconomics, as this has been transformed by the recent political, economic and technological developments and the progress of economic science over the last two decades (Hatzis 2002a, also Gemtos 1999: 10-11). Economic analysis can offer its methodology to lawyers seeking congruence between their interpretation of legal rules or legal standards and the economic reality these rules and standards regulate. Nonetheless, as we observed earlier, the various grand theories developed for Common law have failed to offer a coherent and stable theoretical framework. One then wonders: what is so different about an economic theory since it could also lead to a similar failure? The fundamental difference between an economic theory and a philosophical or doctrinal theory is that an economic theory aims at facilitating the exchange of rights according to people's wishes and not at regulating contracts according to a moral theory (Fried 89 1981), a political and/or social theory, a recovered lost philoso90 phical tradition (Gordley 1991), or a doctrinal construction. The aforementioned theories are based on the legitimate need of theorists to explain contract law and to incorporate it in a perfect, all88 Do not compare the imperfect market against a perfect government. Government has its own costs - and fewer self-correcting mechanisms, such as competition. (Easterbrook 1989: 22). 89 For an example of a theory of contracts based on libertarianism, see Mack (1981) and Rothbard (1982); on socialism, see Wilhelmsson (1993; also 1995); on feminism, see esp. Frug (1985, 1992). 90 These theories are predicated on the futile basis of prediction of judicial decisions (in Common law) or on a shabby and retrogressive conceptualism (in Civil Law). Characteristic examples are bargain theory and reliance theory.
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inclusive, formalistic conceptual world. Their errors are basically two: (a) They try to accommodate commercial relationships in a preexisting conceptual framework designed ex ante and not based on any empirical research. When social and economic reality contradicts the theory, they either dismiss the former or modify the theoretical framework to such an extent that it becomes trivial. (b) They are inattentive to the needs of the parties as eco91 nomic actors. All these theories are grounded on concepts created by philosophers, legal theorists and other eminent scholars who have intuitively discovered what is moral, liberating, socially just, caring, or relational in the exchanges between people and have decided that a theory is needed to somehow regulate these exchanges according to their wise musings. Without denying their good intentions or the value and the descriptive (even exegetic) power of their scholarship, we should observe that these theories usually overlook the fact that most of the times social actors are the best judges of where their interests lie (and even if they do not, nothing can assure us that someone else knows better) and consequently, they may have long-term unfavorable consequences on the 92 lives of the actors in question. In the words of one of the leading Greek civil law scholars, Apostolos Georgiades (1997: 68): The employment of methods and concepts borrowed from economic science can contribute to the law's deliverance from metaphysical
91 For the critique of conceptualism, see Gazes (1995: 37-38) and citations therein. See also Gemtos (1999: 2) for a perspective that is more congenial to ours. According to Judge Posner: The pragmatist thinks that concepts should be subservient to human need and therefore wants law always to consider the possibility of adjusting its categories to fit the practices of the nonlegal community. (Posner 1995a: 399). 92 The mega-example in American legal theory is Williams v. Walker-Thomas Furniture Co., 350 F.2d 445 (D.C. Cir. 1965). See also Veljanovski (1990: 3940) and relatively, but from another perspective, Macneil (1983) (for the problem of external values and the distortions they can create).
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prejudices and it can also shed light on the real incentives of indi93 viduals in the process of the formation of legal rules. If there is (or there should be) a defining characteristic that separates economic theory from all other theories, this is the lack of procrusteanism. Economics begin with the fundamental axiom that each individual is the best judge of his or her own interest. This methodology or theory of rational choice permeates modern economics and all modern economic approaches to social phenom94 ena like law. Rational choice (or economic) theory of law cherishes the freedom of contracts and values the keeping of promises, not for political, philosophical or moral reasons, but as means to the achievement of the welfare of the parties as they perceive it (which is also the reason they engage in contractual relationships in 95 the first place). The limited intervention in these relationships advocated by economists is based on a meta-ethical and positive theory on the failure of the rational choice process (cf. Gauthier 1986: 83-112). This theory is not based on substantive and subjective, but on procedural and objective factors (for such a theory, see Hatzis 1999a). V. For these reasons, it becomes obvious that Greek contract 96 law scholarship is in urgent need of a theory that will unify and purify the widely accepted principles found in the Civil Code or fabricated by the scholars, the general concepts (or standards) underlying and defining the default rules, the concerns of the pragmatic-minded judges, the need for adjustment to the reality
93 See also similar (and more enthusiastic) comments by Gemtos (1999: 1213). 94 See Ulen (1994) and the remarks by Easterbrook (1989: 5-6). 95 The ideal of freedom of contract is not a celebration of mutual exchanges for cash; it is a celebration of voluntary association on whatever terms and conditions the parties to the transaction see fit. (Epstein 1995: 709). See also Collins (1993: 143). 96 For Gazes (1997: 30), the doctrine has turned into stagnant waters (citing F. Wieacker).
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of economic life, and especially the parties' desire for certainty of law and security of business transactions. This theory should encompass, to the greatest extent possible, the semi-theoretical constructs of scholars and courts, in order to have increased chances of being accepted by the mainstream (or at least of influencing it considerably). It should also be sensitive to the needs of the contracting parties that are a lot more contract-wise than scholars and judges (Schwartz 1996: 37). Moreover, this theory is necessary for interpreting a Code that has started to show signs of aging and needs a reaffirmation of 97 its initial mission to support and help the market function efficiently and fairly. A Code that was constructed with a view of a Greek economy based on agriculture, small businesses and a paternalistic capitalism, despite its overall success in the past fifty seven years, begs for a reconstructive interpretation if it is to re98 main attuned to the fast-changing social and economic conditions. A theory that is insensitive to the needs of the parties, such as the legal neoclassical theory currently being intuitively devel99 oped in an amateurish and fragmented manner (see Hatzis 2000c), could prove catastrophic for any economy (and for the Greek
97 Andreas Gazes (one of the preeminent Greek legal scholars, with a career in law spanning seventy years), feels the pressing need for the invigoration of legal science and concludes in an important and profound essay (Gazes 1997: 69): Therefore, the future objectives of legal science are these two: the reconstruction of the system; and the creation of a jus gentium commune, mainly in Europe, but also in international legal science. 98 A new code is not needed for two reasons: (a) Roman law possesses the property of adjustability even today, owing to its abstract construction and its market-friendliness, and (b) The process towards a European Civil Code has been initiated, and it will hopefully be accelerated by the European Monetary Integration. The first draft of the Principles of European Contract Law is very similar to Greek contract law. See the text of ECC and comments in Lando & Beale (1995). See also Lando (1992), as well as Kerameus (1994) for an informative comparison between the ECC and Greek Contract Law. 99 See Zimmermann (1994) for similar remarks but different conclusions on European (Union) private law.
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100
economy in particular), despite the manifested ability of the par101 ties to find ways to circumvent inefficient legal rules. This development could also prove detrimental to Greek Civil law, since this sketchy theory seems to have inherited the worst characteristics of extreme particularism (mainly, the indifference to long-term consequences) and of theoretical doctrinalism (especially rigidity). 2.3. Contract Law and Distributive Justice In this last section, we will deal briefly with the relation between social justice and efficiency and especially with the question
100 See the recent study by Keefer & Knack (1997) (deficient institutions underlie the divergence between poor and wealthy countries, one of the most important indicators of institutional quality being the risk of expropriation and contract repudiation). See also generally Barro (1997). Although Greece is a wealthy country, the risk of falling behind is always lurking, especially at a time when Greece's main economic target is to catch up with the wealthiest countries of the European Union, by developing faster than the EU average growth rate. For the importance of institutional arrangements, see the classic work of Douglass North (1990). See also Dixit & Olson (1996: 39-40): The structure of incentives in the political system and the economic understanding of a nation's elite have, in spite of special-interests pressures and rational ignorance, a major impact on the economic policy a country chooses. If outcomes were not much dependent on economic policies and on the institutional structures and elite opinions that help to determine them, then per-capita incomes across the countries of the world would, to an approximation, be given by each country's inherent endowments of natural resources and human capital. But per-capita incomes are decidedly not determined mostly by endowments: the more than twenty-fold differences in per capita incomes across countries are due in large part to differences in their institutions and economic policies. 101 See Kronman & Posner (1979: 6). However, the parties often do not wish to bargain around an inappropriate default rule (even when it would make sense for them to do so), for strategic reasons of their own: if they did bargain, they would have communicated information which they did not want to reveal to the other party (esp. the lack of trust for the other party or apprehension about their ability to perform as the other party wishes) or they would have made the other party feel uneasy and distrustful. See Baird (1992: 4-5) and also Macaulay (1963), for a relevant much-discussed empirical study. There is also the problem of the cost of writing more complete contracts.
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of contract law's suitability for pursuing and achieving social jus102 103 tice. Although this is a nearly exhausted issue that we will not scrutinize here, we wish to call attention to two points: (a) Contract is simply an ingenious mechanism for the transfer of scarce resources and not a legal fiction, a Platonic Form, a preexisting entity of fixed dimensions (Posner 1990a: 250) where 104 economic relations should fit into in a procrustean way, or even worse, an all-encompassing concept of civil/political organization 105 applicable to every social and/or economic relationship. The role
102 For the much-discussed issue of the divergence of autonomy and welfare, see generally Trebilcock (1993), but also the work of Hadfield (1995; 1996) inspired by Trebilcock. For the relation between efficiency and social justice in contract law, see Hatzis (1997). For the notions of fairness, see Kaplow & Shavell (1999) (ascribing importance to any notion of fairness will sometimes lead to a conflict with the Pareto principle). See also Posner (1997b) (average incomes in a society, rather than the equality or inequality of the income distribution, increase political stability). 103 For an overview of the issues of paternalism and freedom of contract, see Kronman & Posner (1979: 230-267) and for further elaboration, see Kennedy (1982), Kronman (1983) and Zamir (1998). See also Mattei (1997: 1-25). 104 Contract law exists, not to prevent our doing things, but rather to facilitate our doing things - to make our agreements binding, regularized, predictable, and stable. Law is here not some kind of necessary evil [...] but is rather one of the factors that makes for civilized life and complex institutions. (Murphy & Coleman 1990: 27; see also 161-162 for the double privateness of contract law). See generally Holmes (1897: 458). Conceptualism can be equally dangerous and procrustean, even in the particularistic Civil law. See Dellios (1992: passim, esp. 1209) and the apt comments by Phourkiotes (1964: 15, n.86 and also 29). 105 Let's keep in mind that Procrustes had two specializations. The elongation of the concept of contract (which is as dangerous as its abbreviation) led to the phenomenon of the expansion of contractual liability during the 19th century, when an endeavor by judges and theorists of Common law to characterize a number of varying and different obligations as deriving from implicit quasicontracts, failed (Gilmore 1974; see also Lindley 1993 for a broader perspective). This venture by liberal-minded legal scholars, aiming to protect and deify freedom of contracts as a source of utility and liberty, resulted in the falsification of the principle. The gravest error of these scholars was that they tried desperately to fit economic relations into their theoretical framework (but this is hardly a liberal attitude), denying the existence of different sources of obliga-
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of contract law and more generally the state's role should be to help this mechanism operate smoothly - and nothing else beyond that. Many pseudo-problems of contract law are in fact the result of the 106 rigidity of theories and not of insoluble practical issues. According to economic theory, when applying their discretionary powers in order to resolve thorny issues, judges should not rely on analogical reasoning or their intuition (or even their sense of 107 justice), but they should rather examine the business practice and 108 the context of the particular situation, having only one concern in mind: to realize the wishes of the parties, given their reasonable expectations and viewing their actions as revealed preferences 109 (Holmes 1881: 289-307). This is the only way for legal theory, and economic analysis of law for that matter, to serve the main objective of contract law: the facilitation of economic exchanges, that is, the enforcement of private arrangements (see also Easterbrook & Fischel 1991: vii). The most reliable method for a contract law to achieve efficiency is for it to enforce the parties' deals and to reconstruct these deals when necessary, employing as tools the usage of trade and the prevalent business ethics. One should not have to resort to theories of bounded rationality or of relational contracting to acknowledge the importance of the parties' ability to find the less costly solution to their problems (Schwartz 1997: 14).
tion, thus failing to serve the needs of economic life and the social order. See De Geest (1995) and contra Hatzis (2000b). See also Scheiber (1999). 106 E.g. the theory that bases the enforcement of contract on the promise as a source of moral obligation (Fried 1981). 107 For the dangers, see Posner (1996c: 61). 108 We believe that this is also the essence of Karl Llewellyn's contract-asframework versus contract-as-legal rules (see Llewellyn 1931 and Schwartz 1997). 109 According to the former President of Areios Pagos, Judge Andreas Touses (1978: 569, n.2), a contract is binding not only for the two contracting parties but also for the judge himself, who is obligated to interpret it according to the expressed or implied declared will of the parties.
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These observations should not be taken to suggest that there is no place for the intervention of the state and of judges in particular. This intervention seems necessary and inevitable in those cases where the disparities in bargaining power are conspicuous. But such intervention should have as its only purpose to enforce and thus facilitate exchanges and to create, to the greatest extent possible, a perfect market environment, by helping the market correct its failures (mainly the problems generated by significant transaction costs and imperfect information), and not by patroniz110 ing the parties. It is true that on many occasions the failures of the market can lead to unfair outcomes, resulting from highly unequal bargaining positions. But this is not always so. Most of the times, this inequality does not have any effects on the contractual relationship, especially in conditions of (practically) perfect competition. As Allan Schwartz put it: If [consumer markets] do work well, there is little to worry about in terms of justice -that is, justice in the sense of allowing people to do the best they can for 111 themselves under given circumstances. (Schwartz 1986: 110). (b) The state has numerous other opportunities for correcting injustices and pursuing social justice without distorting the mar112 ket and harming people. Even if one doubts that the sole purpose of contract law is efficiency and the realization of the parties' wishes, one could more readily accept that other methods for the
110 According to Parisi (1994: 223): The patronizing is rationalized as an attempt to prevent people from harming themselves or as an encouragement to be more considerate of collective social values. The idea is that individuals should have less freedom to make mistakes than they currently have. 111 Similarly, Easterbrook & Fischel (1991: 21) and Schwartz (1996: 38). 112 The prevailing view among economists is that contract law is not the right vehicle for social justice: Why is that? Because not enforcing contract clauses, which is all judges can do, tends to make people poorer rather than richer. (Schwartz 1986: 115). Karl Llewellyn also believed that distributional goals have no place in contract theory for many reasons and also because of the multiplicity of roles (Schwartz 1997: 7, 13-14).
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113
implementation of distributive justice are more efficient and more 114 fair, like taxation. [J]udges can, despite appearances, do little to redistribute wealth [...] Legislatures, however, have by virtue of their taxing and spending powers powerful tools for redistributing wealth. (Posner 1990a: 359-360; cf. Gazes 1997: 67). Without 115 doubt, the pursuit of social justice by legislative bodies and not by the courts is not only more efficient, but also more comprehen116 sive, democratic and impartial.
113 Anthony Kronman (1980) made a strong case for the inevitable distributive consequences of contract law as enforcement (or non-enforcement) of advantagetaking. However, his arguments apply mostly to the libertarian (but see the critiques of Wang 1982 and Alexander & Wang 1984; see also Murphy & Coleman 1990: 165-175) and not to the economic theory of contracts. One could characterize his treatment of advantage-taking as quite compatible with economic theory. Here we should be reminded that economic theory does not disregard that every contract (and every judicial intervention) always has distributive consequences that are sometimes enormous. The distributive effects are always hidden behind the veil of efficiency in both versions (positive and normative) of the Coase theorem. 114 See Fried (1981: 105-106). If we understand this correctly, this is also Rawls's (1971) idea (voluntary transactions and redistribution via taxation and welfare). However, Kronman (1980) questions the efficiency of tax law. 115 See e.g. 15 of Law 1483/1984, pursuant to which the discharge of a woman who is pregnant or has given birth within one year prior to the discharge, is void (except in the cases where there are other important reasons). See also decision 3275/1998 of the Thessaloniki Court of Appeals. 116 For the clash between efficiency and social justice, see the classic work by Okun (1975). But see recently Swygert & Yanes (1998) (justice requires that legal rules consider both fairness and efficiency, thus a unified theory of justice should consider the question of what agreements parties would enter into if they could bargain costlessly ex ante without knowledge of which side of the bargain they would ultimately obtain). But see critiques of their thesis in Korobkin & Ulen (1998) and Zerbe (1998).
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3. Conclusion In this paper, we determined that the absence of theories developed for Roman contract law and the absence of grand theories developed in Civil contract law scholarship were outcomes of a particularistic approach to the problems created by the deficiencies of markets. This approach was driven by the need for a construction of a legal framework conducive to economic progress. The generation of efficient results by Civil law through the selection of efficient rules and standards was completed over the course of several centuries and stabilized after the great codifications (basically the French-Napoleonic Civil Code and the German Civil Code). Common law had for centuries attempted to develop a similar construct that would be stable enough to facilitate economic relations. The borrowing of ideas and solutions from Civil law was the easy way out. Despite the numerous legal transplants, Common law fought hard to preserve a false independence and a parallel dilapidated coherence by building unified, conclusive, but dogmatic theories. As a result, it offered legitimate arguments to Critical legal theorists (see esp. Kennedy 1976; 1982). The mimicking of Civil law has no doubt led to some efficient results, but with many islands of inefficiency (Collins 1991: 398 and more generally, Epstein 1982) trapped in the sea of rigid theories (bargain theory, privity, etc.). Nevertheless, the process for the civilification of 117 Common law is already under way. On the other hand, Civil law scholarship and practice has found it increasingly difficult to respond to the fast-changing economic circumstances. For the first time in history, economic rela117 In the United States, it is almost half way there. See Crystal (1979) and Gordley (1981). In the United Kingdom, European Union law appears as its Nemesis. See the recent studies by Lewis (1995/96), Ogilvie (1996) and Neate (1996). For Canada, see Gonthier (1993). For observations on this trend, see as early as in Zepos (1937: 472, 474-475) and more recently in Posner (1996b: 2037).
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tions have become so complicated that it is impossible for a judge endowed only with common sense to solve problems created by the dysfunctions of markets (Easterbrook 1989: 4). Economic expertise is not only helpful, but absolutely necessary. Of course, judges are not expected to invent the wheel; but they should definitely learn how to use it. A responsive economic theory of contract law is almost imperative if Civil law is to continue playing the role that it has successfully performed for centuries: providing the legal framework that helps the economy function. Thus, the mainstream construction of the European Civil codes, which is primarily a reflection of the doctrine of freedom of contracts (that should be reconstructively interpreted in order to protect the parties who are disadvantaged in cases of unequal bargaining power), is interestingly compatible with the economic theory we have here advocated. We need only to incorporate contract law doctrines in the perfect/imperfect markets/contracts dis118 course. This would be invigorating not only for Continental legal theory, but also for economic analysis of law and for Civil law in 119 general.
4. BIBLIOGRAPHY
Alexander, Larry & Wang, William (1984), Natural Advantages and Contractual Justice, 3 Law & Phil. 281. Alexandridou, Elisa D. (1987-1988), Conditions Gnrales des Contrats, 40-41 Rev. Hell. Dr. Int'l. 205.
118 See Gordley (1994) for a similar, successful attempt of French 19th-century treatise writers to read liberal ideas and principles in the Code Napolon, although the drafters subscribed to traditional conceptions of private law (that were already outdated when the Code was enacted). 119 For such an ambitious project, see Hatzis (2003) where economic analysis is applied for the first time in all areas of European law by some of the major European law & economics scholars.
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Commentaries on Law & Economics, Vol. 2 ( 2002)

Commentaries on Law & Economics, Vol. 2 ( 2002)

Commentaries on Law & Economics, Vol. 2 ( 2002)

Commentaries on Law & Economics, Vol. 2 ( 2002)

Commentaries on Law & Economics, Vol. 2 ( 2002)

Commentaries on Law & Economics, Vol. 2 ( 2002)

Commentaries on Law & Economics, Vol. 2 ( 2002)

Commentaries on Law & Economics, Vol. 2 ( 2002)

Commentaries on Law & Economics, Vol. 2 ( 2002)

contract law, based on the currently mainstream neoclassical economics.

Commentaries on Law & Economics, Vol. 2 ( 2002)

Commentaries on Law & Economics, Vol. 2 ( 2002)

Commentaries on Law & Economics, Vol. 2 ( 2002)

Commentaries on Law & Economics, Vol. 2 ( 2002)

Commentaries on Law & Economics, Vol. 2 ( 2002)

Commentaries on Law & Economics, Vol. 2 ( 2002)

Commentaries on Law & Economics, Vol. 2 ( 2002)

Commentaries on Law & Economics, Vol. 2 ( 2002)

Commentaries on Law & Economics, Vol. 2 ( 2002)

Commentaries on Law & Economics, Vol. 2 ( 2002)

Commentaries on Law & Economics, Vol. 2 ( 2002)

Commentaries on Law & Economics, Vol. 2 ( 2002)

Commentaries on Law & Economics, Vol. 2 ( 2002)

Commentaries on Law & Economics, Vol. 2 ( 2002)

Commentaries on Law & Economics, Vol. 2 ( 2002)

Commentaries on Law & Economics, Vol. 2 ( 2002)

Commentaries on Law & Economics, Vol. 2 ( 2002)

Commentaries on Law & Economics, Vol. 2 ( 2002)

Commentaries on Law & Economics, Vol. 2 ( 2002)

Commentaries on Law & Economics, Vol. 2 ( 2002)

Commentaries on Law & Economics, Vol. 2 ( 2002)

Commentaries on Law & Economics, Vol. 2 ( 2002)

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