Aristides N. Hatzis

Having the Cake and Eating it Too: Efficient Penalty Clauses in Common and Civil Contract Law

In this paper we examine one of the areas where there is a marked difference between Civil and Common contract law, that of the enforcement of liquidated damages and more particularly of penalty clauses. Common law judges are quite reluctant to enforce liquidated damages, especially if they believe that they include penalty clauses which are not enforceable. On the contrary, in almost all European contract laws liquidated damages are readily enforced, as are penalty clauses when they are not manifestly excessive. Although most law and economics scholars have criticized Common law courts for the non-enforcement of penalty clauses, there is a sizable minority of scholars who have defended the Common law “non-enforcement” policy on the ground that penalty clauses are inefficient because they hinder efficient breach. However, and despite the merits of the arguments advanced by advocates of the non-enforcement of penalty clauses, we believe that Common law’s rejection of penalty clauses is inefficient. We further show that the Civil law solution to the problem is not only comparatively more efficient, but that it can also appease the worries of those scholars who are afraid that efficient breaches will be deterred. The solution that Civil law systems give to the problem manages to enforce the parties’ wishes and to avoid deterring efficient breaches. However, we point out that in order for the Civil law systems to take advantage of this superiority, the interpretation of their Civil Codes should be guided by economic analysis and the respect to the wishes of the contracting parties.

Morality, Social Norms and the Rule of Law as Transaction Cost-Saving Devices: The Case of Ancient Athens

The importance of the institutional framework for economic development is widely accepted today and it is duly stressed in the economic literature. The protection of property rights, the enforcement of contracts and an efficient legal system are the pillars of the contemporary rule of law. However, formal institutions cannot function without being internalized by the citizens and without the strong backing of social norms. Morality and social norms are the major elements of the informal institutional structure, the social capital, which is also critical for social welfare and economic development. In this paper we will discuss both the formal and the informal institutional framework of Ancient Athens, which was a free market society with economic problems similar to contemporary market societies. Athenians developed a highly sophisticated legal framework for the protection of private property, the enforcement of contracts and the efficient resolution of disputes. Such an institutional framework functioned effectively, cultivating trust and protecting the security of transactions. This entire system however was based on social norms such as reciprocity, the value of reputation and widely accepted business ethics. Conformity to social norms as well as moral behavior was fostered by social sanction mechanisms (such as stigma) and moral education. The Athenian example is a further proof of the importance of morality and social norms as transaction cost-saving devices even in quite sophisticated legal systems. Their absence or decline leads inevitably to the need for more regulation and litigation and to a growing preference for clear-cut rules instead of discretionary standards. Athenian law was pioneering in the development of rules and institutional mechanisms suitable for the reduction of transaction costs, many of them surviving in the most complex contemporary legal systems.

The Negative Externalities of Immorality: The Case of Same-Sex Marriage

A number of concepts from economic theory have been used to defend legal paternalism and legal moralism. In this paper I discuss the concept of moral externalities, i.e., of negative externalities of a behavior that is considered immoral by conventional morality. According to some economists the existence of significant negative externalities can justify legal moralism. I attempt to rebut this argument using a Coasean framework (supported by a body of unfortunately little known work on the demarcation of externalities) and by extracting from Richard Posners wealth maximization criterion a theory of self-ownership which places heavier emphasis on consent than utility as a proxy for social welfare. I apply the results discussing the issue of same-sex marriage. I do not attempt to justify it on legal or moral grounds; I aim rather to repudiate the arguments which reject same-sex marriage based on the concept of moral externalities.

The Short-lived Influence of the Napoleonic Civil Code in 19th Century Greece

During the Greek War of Independence (1821–1827) from the Ottomans—which had a nationalistic and liberal character—and for the first decades after the liberation, a number of liberal French-educated politicians and scholars attempted unsuccessfully to introduce the Napoleonic Civil Code (or some clone of it) as the Greek Civil Code. Despite the fertile political and intellectual ground for such an introduction, they failed to achieve their goal due to the “temporary” introduction of Justinians Roman law as the Greek civil law. This led the Greek academic community to Pandektenrecht and the predominance of the 19th century German legal theory (boosted by its organized propagation on the part of a number of German-educated legal scholars).

The Foundations of a Market Economy: Contract, Consent, Coercion

This article shows how contracts are the institutional foundation of a market economy. Contracts create wealth, allocate risk and are based on consent. There is no perfect competition and the markets are characterised by a number of failures; therefore, contracts are not perfect. However, the existence of these failures does not undermine the importance of contract and consent. A common critique of the market economy is that most transactions are based on some form of coercion. The authors try to address this misconception by showing that a contract is the result of coercion not in cases where a choice is hard for a party but when it offers a choice the party does not want to accept.