Determinants of the Optimal Degree of Pro-activeness in Contracting: A Law and Economics Perspective on Optimal Contracting

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    The so-called “pro-active view” of the role of the lawyer is that he or she should ideally anticipate rather than resolve conflict. Applied to the contracting lawyer, the view is that lawyers should avoid conflict by making sure that the contracting parties stipulate in the contract such rights and obligations that may otherwise become the subject of dispute. The present article argues that this “pro-activity view”, while inherently sound, can be carried too far. Pro-activeness is subject to diminishing returns in the sense that some contingencies should not be addressed in contract simply because the costs of so doing is greater than the benefits. This article attempts to delineate these costs and benefits and to thereby account for the factors that enter into the determination of what may be termed the optimal degree of pro-activity in contracting.
    The main point can be stated as follows: whether or not to include a contingency or specific clause in a contract depends on three factors:
    -how important any deviation from the optimal contract is in terms of the essential functions served by the contract, including securing efficient risk-allocation, incentives, and reliance investments,
    -whether the contingency is sufficiently likely and important for it to be worthwhile to spend time on drafting a clause concerning it,
    - whether something approaching the clause may come about as the result of renegotiation of the contract under the shadow of default rules and contract interpretation by the court (including the possibility of invalidation of unfair contract terms) as well as under the parties’ concern for reputation.
    The article will first address the benefits to specific clauses and then address the existing substitutes to elaborate contracting. It will further argue that it cannot be taken for granted that contracts will become more elaborate over time; in areas of economic life where uncertainty is pervasive, one may instead see rather simple contracts supported or enforced through mechanisms that rely not so much on court enforcement as on reputation.
    An example will be used throughout the article to illustrate the main concepts and ideas. The example may not be realistic in all respects; the purpose of it is to illustrate the general problem of how (much) to commit through contracting, not to analyze a specific contracting situation. The example will be introduced below, after which the benefits of elaborate contracting will be analyzed. In the spirit of the theme of the conference on pro-active contracting in the information age, the article ends with some reflections on the implications of computers and the Internet for “the optimal degree of proactiveness”.
    Original languageEnglish
    Title of host publicationA Proactive Approach
    EditorsPeter Wahlgren
    Number of pages8
    Place of PublicationStockholm
    PublisherStockholm Institute for Scandinavian Law
    Publication dateMay 2006
    ISBN (Print)9789185142637
    Publication statusPublished - May 2006
    SeriesScandinavian Studies in Law

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