The Negligence-Opportunism Tradeoff in Contract Law

Abstract

Over the past two decades, law-and-economics scholars have developed two different analytical approaches to contract law without examining the relationship between them. The first approach, based on the idea of the "least cost avoider" developed in tort law, aims to deter "negligent" contracting behavior by punishing a contracting party who fails to take cost-justified precautions. The second approach aims to deter "opportunistic" contracting behavior by punishing a contracting party who affirmatively acts contrary to some contractual expectation or social norm. Typically, scholars focus on one approach or the other in their work. Rarely do scholars combine the approaches. Never have scholars combined them in any systematic way. This paper develops a general fault-based economic theory of contract law that combines the least cost avoider and opportunism approaches, and then uses the theory to explain and critique several contract cases. In many cases, the two approaches point toward the same outcome, but often they conflict and present what I call the negligence-opportunism tradeoff: the legal rule must favor the deterrence of one type of behavior over the other. The negligence-opportunism tradeoff captures to a large degree the fundamental tension in contract law largely ignored by economists, but traditionally recognized by lawyers: the tension between individual freedom of contract and social regulation of the marketplace. In resolving this tradeoff, I argue on efficiency grounds that the law should place a presumptive priority on deterring potentially opportunistic behavior over deterring potentially negligent behavior. To give priority to deterring negligence over deterring opportunism--which many economists often implicitly advocate--perversely rewards deceitful sleaziness while often punishing hapless incompetence, and cracks the foundation of trust necessary for efficient contracting behavior to occur.