As noted above, one fruitful area of the law in which the tools of law and economics provide use is contract law. From an economic perspective, the focus of contract law is to accomplish the goals of the parties in the most efficient fashion. Mercuro, supra at 138. Contract law is a particularly interesting topic because there are different levels where economic analysis is useful. For example, in the contract formation stage, parties must weigh the costs of contract negotiations and the time inherent in including greater and greater numbers of provisions. Contracting is not costless; this leads to parties structuring contracts in a way that approximates the most efficient outcome by incentivizing value-maximizing conduct. Mercuro, supra at 139. This leaves room for court intervention as parties do not take the time to incorporate every possibility or scenario explicitly into contracts. The transaction costs would simply be too high under the Coasean framework, leading to inefficient results.
Another particularly notable area of contract law lending itself to economic analysis, in this case due to its different treatment under civil and common law systems, is breach of contract. Parties to a contract will not typically breach unless it benefits them in some way, or if it is impossible for them to fulfill its terms. The former situation is the heart of the concept of efficient breach. According to Markesinis et al., “A breach may be regarded as efficient in economic terms if it entails an advantage to the guilty party that is greater than pecuniary detriment to the innocent party. In such a case, compensating the innocent party would still leave the guilty party better off than if the contract were to be fulfilled in specie.” Sir Basil Markesinis, Hannes Unberath & Angus Johnston, The German Law of Contract, A Comparative Treatise 399 (2nd ed., Hart Publishing 2nd ed., 2006). As noted above, it a party is defaulting, it is probably because it is in their interest to do so. Put another way, this means that he expects to lose money by going forward with the contract. Incorporating notions of Kaldor-Hicks efficiency, we would allow the party to default so long as a “bribe” can be paid to the wronged party making them whole. On total, this would make the defaulting party better off, while leaving the wronged party no worse off, producing an overall Pareto optimal result. John H. Barton, The Economic Basis of Damages For Breach of Contract, in Economic Foundations of Private Law, 277,304 (Richard A. Posner & Francesco Parisi eds., Edward Elger Publishing, Inc. 2002).
If it is established that parties may default on contracts, and that it may be economically efficient for them to do so, what is the result for the wronged party? There are two main remedies utilized in both common and civil law jurisdictions, but the frequency of use in each system is instructive. For example, court orders forcing performance, an equitable remedy, are more prevalent in Europe, while awards of legal damages focused on making the wronged party whole dominate common law jurisdictions. Therefore, goals guiding the determination of damages in a breach case are expectation protection (or the common law preference for putting the plaintiff in as good a position as if the contract were not breached) and incentive maintenance, (the civil law approach enforcing contract promises). Barton , supra at 304.
Brousseau rightly argues that based on the use of economic reasoning in the US in particular, contracts have a different legal status than they do in civil law nations. Brousseau, supra at 82. In his decision in Co-operative Insurance Society v. Argyll Stores (Holding) Ltd.,  AC 1 at 11-12, Lord Hoffman summarized the historical differences nicely:
“Specific performance is traditionally regarded in English law as an exceptional remedy…by the 19th century it was orthodox doctrine that the power to decree specific performance was part of the discretionary jurisdiction of the Court of the Chancery to do justice in cases in which the remedies available at common law were inadequate. This is the basis of the general principle that specific performance will not be ordered when damages are an adequate remedy. By contrast, in countries with legal systems based on civil law, such as France, Germany, and Scotland, the plaintiff is prima facie entitled to specific performance.”
Therefore, common law has a presumption of damages tempered by an equitable resolution if it were called for, while civil law has an assumption of specific performance tempered by some consideration for damages in impossibility scenarios. A simple example may help illustrate what differences might arise from this difference in remedies. Suppose Augsburg Auto had a vehicle on sale for €12,000. Now suppose Thomas saw the vehicle, which he valued at €15,000. Believing he had found a deal, he offered Augsburg Auto the €12,000, leaving a deposit to go to the bank to get funds. After Thomas left, Dieter stopped by the auto dealer and saw the same car. After being told that an offer for €12,000 had already been made, Dieter decided to trump it and offered €13,000. Shortly thereafter, forgetting the concept of exchange rates and thinking he has found a deal, Joshua arrived and offered €18,000.
Much of the analysis that can be made based on this scenario depends on how scrupulous Augsburg Auto is. However, let us assume for a moment that the dealer is more interested in profits than scruples, clearly a simplifying assumption. Under a common law regime, a wronged party is made as well off as he would have been if a contract were fulfilled. Therefore, if Augsburg sells to anyone but Thomas, and he had valued the car at €15,000, he would likely sue and receive damages in this amount. So, using the above facts, if Augsburg sells to Dieter for €13,000 but must turn around and pay damages to Thomas, it is inefficient because it breaches its contract AND loses money. However, if Augsburg breaks its contract to sell to Joshua, it has breached its contract efficiently. This is because after paying Thomas damages, it still earns €3,000 on the transaction. As it has been shown, expectation damages act then not only to encourage efficient breaches, but to discourage inefficient breaches, thus serving two related but separate societal benefits. Mercuro, supra at 142.
In a civil law system, Augsburg would be forced to sell the car to Thomas based on the specific, agreed upon terms. Therefore, Augsburg would need to sell the car to Thomas for €12,000. Thus, specific performance, like expectation damages, can help contractors avoid inefficient breaches. However, since the sale to Joshua cannot occur, the most efficient outcome, which is €15,000 in damages to Thomas and €18,000 in sales to Joshua, is taken off the table. Arguably, Joshua could buy from Thomas at the higher price, making those parties better off, but there is still a lower balance of payments, and transaction costs might make multiple transactions prohibitively expensive. Mercuro, supra at 142. Additionally, while third party enforcement is at times unavoidable, it is not necessarily efficient. Essentially, “The process of enforcement whilst enabling the benefit of an external coercion to oblige the recalcitrant party to honor his commitments, can be inefficient.” Markesinis, supra at 399. So, not only are additional transactions expensive, the process of enforcing specific performance adds additional transaction costs.
Therefore, a system where damages are the standard in breach cases will typically lead to the most efficient results. Altering the numbers could lead to situations where specific performance is economically beneficial, and it does go some way toward avoiding inefficient results. However, based on pure Pareto and Kaldor-Hicks principles, it appears that the payment of expectation damages leads to the most efficient outcome. Additionally,
“Even if the work under the contract is not completed, an expectation upon entering the contract that the contract may have to be completed might lead to non-optimality. Hence, courts should be hesitant to place very substantial weight upon a role of “enforcing” contracts. Indeed, one might conclude that the fact that one party wants to get out of a production contract should be reason enough to excuse further performance (although not to excuse payment of damages).” Barton, supra at 336.
Under the common law, damages are the remedy most often resorted to. This system sees damages as adequate when the item in the contract is easily obtainable from other sources. Markesinis, supra at 393. Therefore, only situations where an item is of peculiar and practically unique value to the plaintiff lend themselves to specific performance under common law. It is also notable that specific performance is in all cases discretionary on the part of the judge in common law. This is due to its equitable origins. Markesinis, supra at 392. Perhaps speaking even more to cultural differences in the particular remedies, Markesinis notes that, ”the use of specific performance has traditionally not been regarded as generally desirable because it places a strain on the machinery of law and interferes with the personal freedom of the contractual debtor (or defendant).” Markesinis, supra at 392. In England, specific performance is confined to exceptional cases where the claimant is not afforded sufficient protection by damages. It is clear from the commentary that damages are the much preferred remedy in common law jurisdictions, but the ability of judges to temper this in exceptional circumstances with the equitable remedy of performance ensures that the greatest injustices will not occur.
Meanwhile, under the civil law, the preferred tool of the courts is specific performance. In fact, in most situations, impossibility is the only defense to a claim of breach which allows the breaching party to pay damages rather than uphold her end of the contract. Markesinis, supra at 402. German law, in particular, finds the idea of performance so important that it requires an additional time period after a breach and before damages can be claimed in order for the parties to perform on the contract. Burgerliches Gesetzbuch [BGB] [Civil Code] § 281, ¶ 1. Additionally the right to specific performance is more properly called the Primaranspruch, or primary right, with the secondary right being damages. Burgerliches Gesetzbuch [BGB] [Civil Code] § 241, 1. Therefore, according to Markesinis, “While German law does not completely preclude the idea of an ‘efficient’ breach in relation to certain types of contract such as contract of services, it is clearly hostile towards allowing the promisor to avoid the promise to perform and pay damages instead. Thus, the question whether breaching the contract is appropriate does not arise in the first place.” Markesinis, supra at 399. French law is also particularly hostile to damages, much preferring specific performance as the remedy of first choice. Brousseau supra at 84.
It is clear that in civil law jurisdictions, “cross-fertilization of legal and economic thought does not really exist in respect of contracts.” Brousseau supra at 81. However, interestingly, parties to contracts may be finding efficient solutions on their own as commentators have noted that businessmen, particularly in Germany, prefer to claim damages rather than waste resources trying to get a judgment for specific performance. Markesinis, supra at 399. Therefore, though the judiciary has not been compelled, or allowed, to come to the most efficient results, it is possible they are still being reached when savvy parties are involved. This is also additional proof that damages may be the most efficient manner of dealing with breaches.
Summary of Economic Analysis
What conclusions can be drawn from this analysis? First, the ability of common law judges to use discretion in remedies allows for perhaps a more economically efficient system that does not entirely abandon equitable considerations. Meanwhile, the inability of civil law judges to provide damages except in very specific circumstances may not always be efficient, but it does provide certainty and an arguably more moral solution. Despite this inability, the fact that businessmen do sometimes request their secondary right of damages shows that efficiency can also be fair, and still reached despite the restrictions felt by civil law judges. Some have argued based on this framework that globalization and acceleration of technological change have lead to a need for the writers of civil codes to take under consideration different frameworks for contract law. Brousseau supra at 92. Additionally, “though economic analysis of contract law has occurred under common law premises, the use of economics to evaluate civil codes is promising.” Brousseau supra at 91. Whatever the future of the civil codes may be, however, it is clear that change incorporating efficiency criteria will need to come from legislators rather than the bench as it has occurred in common law jurisdictions.
Though there may be similarities, particularly with the development of constitutional law in many civil law jurisdictions, the overall development of law in the two major legal traditions can be dramatically different. In one particular area, contract breach, long-standing traditions outside the scope of the legal systems themselves lead, at least in part, to how remedies in the legal systems vary. These views, though under assault by globalization, international contracts, etc., are unlikely to shift significantly in the near term to produce what proponents of the predominant Chicago School of Law & Economics would view as an efficient outcome in contract breach cases. If and when they do, it will necessarily be due to a groundswell of legislative support rather than the accumulation of results from the judicial bench.