Melvin Aron Eisenberg

The Limits of Cognition and the Limits of Contract

Contract law recognizes a number of exceptions to the rule that courts should fully enforce bargains between capable actors. In this article, Professor Eisenberg argues that we can best justify a number of these doctrines by reference to the limits of human cognition. He canvasses recent empirical research on the cognitive limits relevant to contracting and then shows how these discoveries shed light on six areas of contract: liquidated damages, the excuse of express conditions, form contracts, contracts to waive fiduciary obligations, agreements governing thick relationships, and prenuptial agreements. While the limits of cognition do not explain all of contract law, Professor Eisenberg argues, an understanding of the psychological constraints on decisionmaking should play a central role in the development of contract doctrine.

Private Ordering Through Negotiation: Dispute-Settlement and Rulemaking

Negotiation is a vital instrument in the private ordering of affairs among disputants and among those who seek to work out rules to guide their future conduct in relation to one another. In this Article, Professor Eisenberg analyzes the way principles, rules, and precedents operate in private negotiation, both in the context of resolving present disputes and in the context of rulemaking to govern future conduct. Professor Eisenberg rejects the widely perceived dichotomy between norm-free negotiation and norm-bound adjudication, and suggests that norms play an integral role in the negotiation process, especially in the resolution of disputes. While granting that rulemaking depends in large part on the relative bargaining strength of the parties, Professor Eisenberg contends that even in. rulemaking situations the invocation of norms will have a significant impact on negotiation, especially where the relationship between the parties is characterized by dependence.

Corporate Law and Social Norms

Corporate law serves both to facilitate and to regulate the conduct of the corporate enterprise. Insofar as corporate law is regulatory, it provides incentives and disincentives to the major actors in the corporate enterprise -- directors, officers, and significant shareholders -- through the threat of liability. In significant part, however, these actors are motivated not by the desire to avoid liability, but by the prospect of financial gain, on the one hand, and by social norms, on the other. Much work has been done on the way in which these actors are motivated on the threat of liability and the prospect of financial gain, but relatively little work has been done on the operation of social norms. In this Article, I examine the interrelation of social norms and law in corporate law. The purpose of this examination is to illuminate both corporate law specifically, and the interrelation of social norms and law generally, by studying ways in which that interrelation operates in a specific field. I focus on three kinds of social norms, which I call descriptive norms, conventions, and obligational norms. The organization of the Article is as follows: I begin by describing and defining the kinds of social norms that are relevant to law. I then consider, in a preliminary way, the effects and origins of social norms. Finally, I examine the critical role of social norms in three central areas of corporate law: fiduciary duties (care and loyalty), corporate governance (board composition and the role of institutional investors), and takeovers. In the course of that examination, I apply and elaborate the introductory analysis concerning the kinds, origins, and effects of social norms, and consider some of the kinds of interrelations between social norms and law.

Damages for Breach of Contract

I. THE MEANING OF INJURY AND COMPENSATION ........... 1435 II. BASIC DAMAGE FORMULAS ............................... 1438 A. Substitute-Price ....................................... 1439 B. Lost-Surplus .......................................... 1439 C. Opportunity-Cost ...................................... 1440 D. Out-of-Pocket-Cost .................................... 1442 E. Diminished-Value ..................................... 1442 F Add-Ons and Offsets .................................. 1442 III. COMPENSATORY DAMAGES AND MARKET STRUCTURE .... 1444 A. Perfectly Competitive Markets ......................... 1445 L The Traditional Model of Business Conduct in Perfectly Competitive Markets ..................... 1445 2. The Statistical-Planning Model of Business Conduct in Perfectly Competitive Markets ................... 1449 B. Imperfectly Competitive Markets ....................... 1451 1. The Traditional Model of Business Conduct in Imperfectly Competitive Markets ................... 1451 2. The Fishing Model of Business Conduct in Imperfectly Competitive Markets ................... 1455 IV. WHAT MEASURE OF DAMAGES SHOULD THE LAW PREFER? ..... .................................... .. 1459 A. The General Case ..................................... 1459 1. Performance ...................................... 1462 2. Precaution ........................................ 1464 3. Reliance .......................................... 1465

The Bargain Principle and Its Limits

How far should bargain promises be enforced? The bargain principle a central thesis of traditional contract law states that, in the absence of a traditional defense relating to the quality of consent, bargain promises should be enforced to their full extent. Professor Eisenberg argues that it is necessary to rethink the place of that principle in contract law. He first shows that the two justifications of the bargain principle, fairness and efficiency, are entirely persuasive in the classic case of a contract that has been made in a perfectly competitive market and that only one party has performed. Professor Eisenberg maintains, however, that the principle of unconscionability often justifies limitations on the bargain principle when the assumption of a perfect market is relaxed. In particular, he sets out four categories of contracts involving the exploitation by one party of anothers distress, transactional incapacity, susceptibility to unfair persuasion, or ignorance about prices and shows how the bargain principle falters in those cases because its justifications are not met. Finally, he examines wholly executory contracts and demonstrates how the reach of the bargain principle in such cases depends on a sensitive consideration of the types of parties and commodities involved.

Fairness, Character, and Efficiency in Firms

Agency problems beset firms and prompt opportunistic behavior by employees. Opportunistic behavior redistributes value, whereas cooperative behavior creates value. Firm-specific fairness norms typically promote the firm’s efficiency by increasing cooperation and decreasing opportunism. Firm-specific fairness norms best promote efficiency when supported by reputation effects and when the firm’s agents internalize the norms. People who internalize norms acquire good character. We will develop the concept of “good agent character,” by which we mean agent character that serves the firm’s profitability by embodying the firm’s fairness norms. Good agent character conveys an advantage to superiors and subordinates in forming cooperative relations with other people who can read character.

The Emergence of Dynamic Contract Law

Contract law doctrines can be ranged along various spectra. One of these spectra runs from the static to the dynamic. A contract law doctrine lies at the static pole of this spectrum if its application turns entirely on what occurred at the moment in time when a contract was formed. A contract law doctrine lies at the dynamic pole if its application turns in significant part on a moving stream of events that precede, follow, or constitute the formation of a contract. Another spectrum runs from the binary to the multifaceted. Contract law doctrines are binary if they organize the experience within their scope into only two categories. Contract law doctrines are multifaceted if they organize the experience within their scope into several categories, including one or more intermediate categories. Classical contract law was a rigid, rather than a supple, instrument. Its rules were often responsive to neither the actual objectives of the parties, the actual facts and circumstances of the partiesâ transaction, nor the dynamic character of contracts. Instead, the rules of classical contract law were centered on a single moment in time, the moment of contract formation. accordingly, classical contract law doctrines were almost wholly static and also tended to be binary. The twentieth century witnessed the development of a modern contract law that has largely overthrown classical contract law. This overthrow has occurred in two ways. To begin with, in many cases modern contract law has reversed or fundamentally modified the rules of classical contract law. More important than the overthrow of specific rules of classical contract law, however, has been the overthrow of the deep structure of classical contract law. Where classical contract law had an overriding preference for rules that were objective and standardized, modern contract law has been highly flexible in adopting rules that are individualized and even subjective. Where classical contract law rules were typically binary, modern contract law rules are often multifaceted. Finally, where classical contract law was largely static, modern contact law is, in large part, dynamic. So, for example, static rules of interpretation have been replaced by dynamic rules that take into account events before and after the moment of contract formation; the static legal-duty rule has withered almost completely away, to be largely replaced by a dynamic modification regime that takes into account the value of ongoing reciprocity; a static judicial review of liquidated damages provisions is giving way to a dynamic review that takes account of the actual loss; and static offer-and-acceptance rules have been replaced by dynamic rules, such as the duty to negotiate in good faith.

Actual and Virtual Specific Performance, the Theory of Efficient Breach, and the Indifference Principle in Contract Law

Introduction .............................................................................................. 977 I. The Indifference Principle ................................................................. 979 A. The Efficiency and Fairness of the Indifference Principle ......... 980 B. Recent Efficiency-Based Arguments Against the Indifference Principle ................................................................. 981 II. The Shortfall Between Expectation Damages and the Indifference Principle ........................................................................ 989 A . M arket-Price Dam ages ............................................................... 989 B . L ost Profits .................................................................................. 99 1 1. The C ertainty R ule ............................................................... 991 2. The Principle of Hadley v. Baxendale .................................. 993 C. The Cost of Dispute Settlement, the Time Value of Lost Gains, and the Risk of the Promisors Insolvency .............. 995 III. The Theory of Efficient Breach ......................................................... 997 A. The Overbidder Paradigm and its Inefficient Consequences ...... 998

Legal Models of Management Structure in the Modern Corporation: Officers, Directors, and Accountants

Contrary to the legal norm, the functions of managing the business of a corporation and making business policy generally vest in the executives rather than the board. After examining the reasons why this condition prevails, Professor Eisenberg analyzes past proposals for reform, which typically have sought ways to reinvest these functions in the directors. Finding fault with the premise of these proposed reforms-that directors can successfully either manage or make business policy in modern, complex corporations-he then assesses the remaining functions of the board. His conclusion is that one such function, monitoring the performance of the chief executives office, is both critical to the corporation and uniquely suited to the board. He therefore proposes changes in the law of corporations and corporate accounting to ensure that the board will have adequate independence and sufficient data to perform this monitoring function effectively.

The World of Contract and the World of Gift

Under the donative-promise principle, a simple, unrelied-upon donative promise is unenforceable. In the past, this principle has been explained largely on the ground that a rule under which such promises were enforceable would involve significant process problems. In this Article, Professor Eisenberg develops two substantive bases for the donative-promise principle: (1) The world of gift would be impoverished if simple donative promises that are based on affective considerations, such as love or friendship, were folded into the hard-headed world of contract. (2) Where a donative promise is based on affective considerations, in the absence of reliance a donative promisee is morally obliged to release a repenting promisor. In the course of the Article, Professor Eisenberg shows why the principles that govern donative promises play a key role in both contract doctrine and the social significance of contract doctrine. For example, developments in the area of donative promises have been instrumental in leading to a new principle of contract remedies, under which the extent to which a promise is enforceable depends on the reason why the promise is enforceable. Professor Eisenberg also considers the major theses that have been put forward in recent commentary on donative promises, including claims that under present law all seriously made promises are enforceable by expectation damages.