In our book The Choice Theory of Contracts (Cambridge, Amazon, SSRN), we develop a liberal theory of contract law.  In three forthcoming essays, we reply to critics and show how and why autonomy must be contract’s ultimate value.  Our first essay – the focus of this OBLB post – engages with the challenge from law-and-economics; the second essay replies to contract law scholars; the third essay addresses legal philosophers. 

One core task of Choice Theory is to persuade advocates of economic analysis that they must situate their enterprise within our liberal framework.  Indeed, we go further:  for contract law, welfare economics is indefensible without individual autonomy as its foundation.  Most efficiency theorists do care about human freedom, but they haven’t had a compelling way to incorporate autonomy into their models – besides some hand-waving it its general direction.  We provide a secure normative foundation for economic analysis of contract.  But respect for autonomy comes at a price, both theoretical and doctrinal, for efficiency theorists.  Freedom is not free.

Oren Bar-Gill pushes back strongly in his essay, Choice Theory and the Economic Analysis of Contracts (forthcoming in the Jerusalem Review of Legal Studies, 2019). (See also Contracts and Choice Theory, Part 1 – Choice Theory and the Economic Analysis of Contracts).  By highlighting the substantial convergence between choice theory and a welfarist view, Bar-Gill offers a penetrating – perhaps devastating – critique of our liberal approach.  If he is right, then what does choice theory add?  The burden is on us to demonstrate that welfare economics cannot simply absorb contractual autonomy.  Our essay (the first of the three linked above) engages this challenge.  We show that choice theory has irreducible normative and reformist value along the four dimensions that are core to Bar-Gill’s critique:

(1) Regard for the Future Self. The first dilemma Bar-Gill discusses involves the outer limits of people’s power to commit themselves into the future – such as enforceability of employee non-compete agreements or advance sales of future wages.  We show that regard for our future selves – the ability to write and rewrite the story of our lives – better explains and justifies a wide range of existing contract doctrines than does the welfare economics approach.  While technological advances could plausibly justify eliminating these limits if they were welfare-driven, they cannot eliminate the autonomy-related reasons.

In his OBLB post, Bar-Gill counters that we provide no precise formula for when the right to re-write should dominate the right to write.  He is correct, up to a point.  In our defense, we note economic analysts of contract have had a fifty-year head start in empirical research.  Give us a decade or two of empirical work based on Choice Theory’s research agenda and we’ll show how to implement an autonomy-based teleological approach to contract.  But even at this preliminary moment, our account has traction:  we should focus on the autonomy implications of contracting for the future self, irrespective of the need to internalize any possible negative externalities of these contracts.  Furthermore, this foundational inquiry is not redundant even absent any plausible concern for imperfect rationality.

(2) Relational justice is Not Distributional Justice.  The most fundamental claim Choice Theory makes is that contract’s legitimacy necessarily relies on reciprocal respect for self-determination, and that, in turn, requires a commitment to relational justice.  Bar-Gill is not impressed.  For him, economic tools break apart our relational justice category.   We readily agree distributive analysis is important.  But this is not what relational justice is about.  Indeed, collapsing relational justice into distributive justice is exactly what happens if we shift from an autonomy-based theory of contract, which focuses on the parties’ interpersonal interactions, to a welfarist one, which focuses on the social order as a whole. We discuss multiple areas of contract doctrine – from disclosure duties in securities transactions to substantial performance doctrine in service contracts – that can only be explained through our prism. 

(3) Community is not Utility.  For us, “community” refers to intrinsically relational goods, such as mutual trust, interpersonal commitment, support, caring, and self-identification. Bar-Gill questions the prevalence of conflicts between community, so defined, and utility; he seems skeptical about the incommensurability of these types of goods, or perhaps believes that differences are not meaningful in practice.  We confess we are skeptical about his skepticism. Outside the sphere of business contracting – think about contracts in the spheres of intimacy and of work – relational goods are often central to contracting and not meaningfully reducible to material benefits.

(4) The Obligation of Intra-Sphere Multiplicity.  Finally, Bar-Gill argues that the prescription we most emphasized in Choice Theory – facilitating minoritarian and utopian contract types – may not distinguish choice theory from welfarism.  As he notes, economic analysis has long recognized the importance of minoritarian default rules.  For choice theory, however, the state’s obligation regarding contract types has a decidedly non-welfarist foundation, and it points in a different reformist direction.  Our teleological theory reveals contract to be essentially a power-conferring institution, not a duty-imposing one.  Contract law offers people a new power, the ability to make their lives meaningfully their own by legitimately enlisting others in their most important projects.  In turn, this insight implies that one of the most fundamental contributions contract can, does, and should make to liberal societies is to ensure an adequate range of meaningfully-available, normatively-attractive contract types in each important sphere of human interaction. Thus, choice theory adds distinctive empirical questions to the usual ones that welfarist analysis would ask.  The bottom line is we must look beyond people’s sheer preferences to fine-tune intra-sphere multiplicity so it can serve people’s autonomy.

Since publishing Choice Theory, we have engaged dozens of reviews and responses. All this rigorous debate confirms for us one core point:  contract’s ultimate value must be autonomy, properly understood and refined.  It cannot be welfare.  Autonomy justifies contract.

Hanoch Dagan is Stewart and Judy Colton Professor of Legal Theory and Innovation & Director of the Edmond J. Safra Center for Ethics, Tel-Aviv University

Michael Heller is Lawrence A. Wien Professor of Real Estate Law, Columbia Law School.