Corporate & Securities Law

Epstein on the Economics of Fault in Contract Law

A new paper from Richard Epstein came across my inbox via SSRN this morning, The Many Faces of Fault in Contract Law: Or How to Do Economics Right, Without Really Trying?  Here’s the abstract:

Modern law often rests on the assumption that a uniform cost/benefit formula is the proper way to determine fault in ordinary contract disputes. This Article disputes that vision by defending the view that different standards of fault are appropriate in different contexts. The central distinction is one that holds parties in gratuitous transactions only to the standard of care that they bring to their own affairs, while insisting on the higher objective standard of ordinary care in commercial transactions. That bifurcation leads to efficient searches. Persons who hold themselves out in particular lines of business in effect warrant their ability to achieve uniform standards, while individuals who seek favors from their friends are incentivized to choose them carefully given the subjective standard of care. These results, moreover, derive from the Roman conceptions of care brought into the Anglo-American law through the 1703 decision in Coggs v. Bernard, and are shown to have surprising durability in dealing with agency, medical malpractice, occupier liability, guest statute and frustration cases. Often the efficient standard of fault is given only to those who do economics without really trying.

Full post as published by Truth on the Market on January 12, 2009 (boomark / email).