Legal Theory Lexicon:

Introduction At some point in the introductory class in contract law, students are likely to encounter a very powerful idea--the distinction between "default rules" and "mandatory rules." The basic distinction is easy to grasp. Some rules of contract law supply default terms that are subject to contractual override; other rules of contract law are mandatory--they can't be modified by the contract. Lurking in the background of this distinction is a theoretical construct--the complete contract, an idealized contract that would include explicit terms covering every possible contingency. Once you understand the distinction between default rules and mandatory rules, additional questions arise: as a matter of normative contract theory, which rules should be default rules and which rules should be mandatory? And what normative principles should guide the design of default rules?

As always, this post in the "Legal Theory Lexicon" series is aimed at law students--especially first year law students--with an interest in legal theory.

Default Rules and Mandatory Rules Let's start with the "takeaway" point. In contract law, we can sort the rules into two sorts, "default rules" and "mandatory rules."

Here's an example. The Uniform Commercial Code (or UCC, the codified law of contract that applies to contracts between businesses as a matter of state law in the United States) creates a duty to act in good faith--this is a mandatory rule, because this duty cannot be disclaimed by a contractual provision. The UCC also includes an implied "warranty of merchantability," that attaches to contracts, but can be waived by agreement--this is a default rule.

Grasping this distinction is important for at least two reasons. First, unless you know whether a given rule of contract law is a default rule or a mandatory rule, you don't really know the law. And it isn't always clear whether a given rule is one or the other: the usual tipoff is language like, "unless the contract provides otherwise" or "absent an agreement to the contrary." Second, the distinction between default rules and mandatory rules is fundamental to the normative structure of contract law. Learning contract is more than a matter of mastering the rules; mastering the arguments of principle and policy that can be used to argue for and against the rules is equally important. But the arguments for default rules and the arguments for mandatory rules must be different--because these two kinds of rules have different functions.

Generalizing the Idea of "Default Rule" Although the notion of a "default rule" is usually introduced to law students in the context of contract law, the idea is more general. For example, we could think of the law of wills and intestate succession through this theoretical lens. Rules of intestate succession are "default rules" that can be overridden by a will. Much of the law of wills consists of default rules, and we can imagine a "complete will" that covered every possible contingency.

Similarly, we can imagine a "complete code" that covers every possible action or inaction and specifies what legal consequences follow. Given that actual codes are incomplete, we can look at the law of statutory interpretation as including a collection of "default rules" that allow courts to fill in the gaps. Another example is provided by corporations law--once again, some of the rules are mandatory and others are merely defaults.

You get the idea--default rules can be applied to any authoritative legal text that is "incomplete."

Normative Theories of Default Rules Once we understand the distinction between default rules and mandatory rules, we can then ask the question, "What normative principles should guide the design of default rules?" For example, we might decide that lawmakers (legislators or common-law judges) should attempt to devise the default rules that are most likely to be the rules that the parties would have adopted had they contracted on the issue. Or we might want "efficient" default rules. Or default rules that maximize utility. All of these approaches are associated with normative law and economics. But there are other approaches as well. For example, we might try to design default rules so that they maximize the autonomy or liberty of the parties to the contract--imposing the fewest possible restrictions that have not actually be agreed to by the parties. Or we might impose default rules that will serve some other goal such as distributive justice or economic equality.

Default Rules as Public Goods Another interesting question is why the law provides default rules at all. Why don't we force the parties to reach complete agreements? Immediately, of course, we realize that this would be very costly. Drafting a complete contract would almost always (perhaps always) cost more than the contract is worth. And there is another problem as well. Most contract provisions are not protectable as intellectual property; in general, you can't copyright or patent a nifty contractual provision. (You may be able to copyright the specific language, but that doesn't preclude someone else from expressing the idea in different language.)

This suggests an interesting perspective on the economics of default rules. We might see the default rule provisions of contract law as a "public good." That is, consumption of default rules is "nonrivalrous"--because my use of a given provision doesn't interfere with your ability to use the same provision. And consumption of default rules is "nonexcludable"--assuming that there is no intellectual property protection available for "form contracts" or "form contract provisions." If this is correct (and it may not be), then there is a classic economic justification for government to provide for the "public good." For more on the idea of a public good, see Legal Theory Lexicon 029: Public and Private Goods.

Complete Contracts Now that we have the basic distinction between default and mandatory rules in mind, let's discuss the related idea of a complete contract. Once again, the core intuitive idea is relatively simple--a complete contract has provisions that cover "every contingency." In other words, a complete contract has no gaps.

Why did I put "every contingency" in scare quotes? Because "every contingency" is an ambiguous way of formulating a fairly complex idea. We need some special terminology here. Economists tend to use the phrase "states of affairs" to express the idea of a contingency. A "state of affairs" is simply a way that the world can be--a complete specification of the way things are. Philosophers use different jargon--the phrase "possible world" expresses the same idea as "state of affairs."

So a truly "complete" contract would be a contract that specified the duties and rights of the parties for all the future states of the world--or all the possible worlds that share the history of the actual world up to the point the contract is formed. Once you think about it, it becomes clear that no actual contract could be complete. There are infinitely many possible future states of the world--and a contract that covered all of them would have an infinite number of provisions, and hence the drafting of such a contract would never be complete--it would still be unfinished when the universe reached a state of complete entropy. (Oh, and by the way, that's one of the contingencies that the contract would have to cover.)

So the notion of a complete contract is an idealization--not a practical option. And once we see this point, another point becomes obvious. Contract law cannot provide default rules to cover every possible contingency either. Of course, as a practical matter, contract law doesn't have to cover all the contingencies. Some possible future states of the world are so remote or far-fetched that they can safely be disregarded--Martian invasions and or the discovery of a universal fabrication machine are not contingencies about which we need worry.

The General Idea of Completeness Just as the idea of a default rule can be generalized beyond contract law, so can the idea of completeness. So we can imagine "complete wills," "complete corporate charters," "complete trusts," and so forth. One particularly important idealization is the idea of a "complete code"--a legal code that itself has provisions that cover every possible contingency. The complete code will have default rules or mandatory rules that for every possible future state of affairs.

Conclusion Well, as is usually the case, we've barely scratched the surface. Nonetheless, I hope this Lexicon entry has given you a basic framework for understanding the ideas of a complete contract and the distinction between default rules and mandatory rules. Once you have this ideas in your conceptual toolkit, you are likely to start noticing them in all kinds of contexts, not just in contract law, but in every legal subject you encounter. When you do, you might ask yourself, "Why is this a default rule rather than a mandatory rule?," or vice versa. And, "What normative legal theory or principle supports this choice?"

Links
Default Rules on Wikipedia

Complete Contract on Wikipedia

Ian Ayers & Robert Gertner, Filling Gaps in Incomplete Contracts: An Economic Theory of Default Rules, 99 Yale Law Journal 87 (1989)

Ian Ayers, Default Rules for Incomplete Contracts

The Desert and the Jungle: Alan Schwartz and Robert Scott on Contract Theory

(This entry was last updated on August 19, 2007.)

Introduction Distributive justice is one of the central topics of political philosophy and plays a key role in contemporary debates about normative legal theory. Should contract law take distributive consequences into account? Should tort law aim at "risk spreading"? Should the Equal Protection Clause of the United States Constitution be read as guarantee of the equal distribution of rights or resources? In order to answer these and similar questions, we need to have some account of distributive justice? What makes the distribution of liberties, income, and wealth fair? Should the law aim at equality? And if it should, what sort of equality?

This entry in the Legal Theory Lexicon will provide a brief introduction to distributive justice. As always, the Lexicon is aimed at law students (especially first-year law students) with an interest in legal theory.

Context A prior entry in the Lexicon provided a brief overview of the idea of Justice. (Legal Theory Lexicon 018: Justice) In that entry, we divided the general topic of justice into four parts: (1) distributive justice, (2) corrective justice, (3) political justice, and (4) procedural justice. Corrective justice is concerned with the righting of wrongs: so, in criminal law, we might be concerned with punishing crimes, and in tort law, we could focus on the rectification of wrongfully inflicted harms. Political justice is concerned with issues such as voting rights, democracy, legitimacy, and authority. Procedural justice addresses questions about the fairness of civil and criminal proceedings. Our topic today is distributive justice. As a rough and ready starting point, let's say that distributive justice addresses questions about the distribution or allocation of liberties, wealth, and income. As we shall see, one of the major debates about distributive justice will call this rough and ready starting point into question, because "liberties, wealth, and income" may be the wrong target for theories of distributive justce. But let's put that concern aside for now.

Rawls's Theory of Distributive Justice: Justice as Fairness Discussions of distributive justice usually start with the work of John Rawls--the most influential political philosopher of the 20th century. It really isn't possible to do justice to Rawls's theory in a paragraph or two, but I'm going to try.

Let's start with the historical roots of Rawls's theory. Rawls saw his theory as an extension of the social contract tradition--associated with Thomas Hobbes, John Locke, and Jean-Jacques Rousseau. Traditional social contract theory posits a state of nature--in which there is no government--and then asks what would be the content of a social contract--an agreement to enter civil society. If we assume that the state of nature and the social contract are hypothetical (not actual), we can then ask the question: is an agreement reached in the state of nature fair? The answer to this question might be, "No, a social contract reached in the state of nature would not be fair, because it would favor those who are advantaged by the conditions of the state of nature, e.g. the strong, the smart, and the powerful." Rawls attempted to correct that problem with classical social contract theory by positing what he called the "original position." In the original position, the parties are to agree on principles of justice to govern the basic structure of society. Unlike the state of nature, however, the original position includes a "veil of ignorance," which prevents the parties from knowing the specific characteristics of those whom they represent.

Rawls argues that the parties to the original position would choose two principles of distributive justice:

1. The Equal Liberty Principle: Each person has an equal claim to a fully adequate scheme of equal basic rights and liberties, which scheme is compatible with the same scheme for all; and in this scheme the equal political liberties, and only those liberties, are to be guaranteed their fair value.

2. The Difference Principle: Social and economic inequalities are to satisfy two conditions: (a) They are to be attached to positions and offices open to all under conditions of fair equality of opportunity; and (b), they are to be to the greatest benefit of the least advantaged members of society.

The first principle has priority over the second in cases of conflict.

In this very short introduction, we won't try to recreate the reasoning that would lead the parties to the original position to adopt the two principles. The basic idea of Rawls's argument is that the parties behind the veil of ignorance would have to take into account the possibility that they represent the least fortunate members of society. To protect the interest of those who are worst off, they would first make sure that everyone's basic rights--liberty of conscience, freedom of speech, due process--were protected: that is the role of the equal liberty principle. Then, the parties in the original position would attempt to make sure that wealth and income (and other basic goods) were were distributed so as to make the worst-off members of society as well off as they could be made: that is the role of the difference principle.

Rival Approaches to Distributive Justice What are the alternatives to justice as fairness? Let's take a quick look at four rivals to Justice as Fairness: (1) utilitarianism, (2) egalitarianism (or "strict equality"), (3) desert, and (4) libertarianism.

Utilitarianism Classical utilitarianism suggests that we should maximize the sum total of utility--Jeremy Bentham's slogan was "the greatest good for the greatest number." For classical utilitarians, the distribution of goods and resources doesn't matter in and of itself. What matters is how much good can be produced, not how it is distributed. This does not mean, however, that utilitarians do not care about the distribution of wealth and income. For example, a utilitarian might argue that wealth and income have "diminishing marginal utility." That is, the first $1000 of income is very important--it allows you to buy essentials like food and shelter. But the difference between $100,000 and $101,000 may be very minor--it allows you to buy a nicer car. Therefore, the utilitarian might argue that egalitarian distributions of resources will tend to increase total welfare--unless there is some countervailing reason such as increased incentives to produce useful goods and services that might result from unequal distributions of wealth and income.

Utilitarians are frequently criticized on the ground that they lack a principled objection to gross inequalities. Suppose, for example, that the total welfare of society could be improved by enslaving a small group. If this were the case, then utilitarians would be committed to the consequence that such slavery is "just" or "good," but this seems counter intuitive. Utilitarians can reply to this point in many ways, but one argument is that, in fact, slavery does not increase total utility, but actually is quite harmful. Critics are likely to say that this may usually be the case, but that utilitarianism falters on the exceptional cases where gross inequalities lead to net welfare gains. Of course, the argument can be extended by both sides, but you get the general idea.

Utilitarians are likely to object to Rawls's second principle--the difference principle--on the ground that it requires that we pay a huge penalty in total welfare to produce a small benefit for those who are least advantaged. For example, suppose that the average income could be increased by $10,000 per year if the income of the worst-off group were decreased by $10 per year. Utilitarians argue that it is wrong to deprive a large group of a very substantial amount of income in order to preserve a small amount of income for a small group. Once again, the arguments will go back and forth, but you can see how the issue is framed.

Egalitarianism Another rival of justice as fairness is "strict egalitarianism." The difference principle permits inequalities of wealth and income if those inequalities benefit the worst-off group in society. For example, it it could be shown that private ownership of capital was required to produced economic growth that benefits even the poorest members of society, the difference principle might allow Bill Gates to accumulate billions of dollars while the poorest members of society subsisted on a tiny fraction of that. Strict egalitarians maintain that distributive justice requires that each person recieve the same share--even if the consequence is that everyone (including the worst-off) gets less than they could if inequalities were permitted.

It is very important to understand that egalitarianism comes in many forms--because egalitarians have different answers to the "Equality of what?" question--which we will cover below.

Desert Yet another view of distributive justice would link distributive shares with desert or deservingness. In a very broad sense, one might say that all theories of distributive justice are desert-based. Egalitarian theories simply say that everyone deserves the same share. Fair enough! But I want to focus on a special kind of desert-based theory--one that focuses on merit or effort or some other quality as the basis for desert. For example, one might believe that wealth and income ought to be distributed in proportion to social contribution. If I work hard and create valuable goods or services, then I deserve a greater share of wealth and income, as compared with someone who makes a lessor contribution.

This kind of desert-based theory is quite different from justice as fairness, utilitarianism, or egalitarianism. This difference could be expressed in one of two ways. We might say that these other theories have a different conception of desert: for example, egalitarians may believe that each person is equally deserve of resources. Or we might say that the other theories deny the relevance of deserve; for example, egalitarians may believe that contribution-based desert is morally irrelevant.

Libertarianism Libertarianism represents another approach to distributive justice. On the one hand, libertarians are likely to endorse some version of what Rawls called the equal liberty principle. That is, libertarians are likely to believe that each individual should have an equal right to basic liberties (or autonomy). On the other hand, most libertarians reject that the idea that there should be any principles that govern the distribution of resources. For libertarians, the distribution of wealth and income flows from the free choices made by individuals. That might result in relatively equal distribution of wealth and income, or it might result in massive inequalities. For the libertarian what matters is whether the transactions or transfers are themselves just. If I freely choose to sell you Whiteacre, and I gamble away the proceeds while you grow rich, then the resulting inequality is just because it result from voluntary transactions.

In a sense, then, libertarians reject the idea of "distributive justice" as applied to the distribution of wealth and income. At the same time, however, libertarians tend to be strict egalitarians when it comes to the distribution of basic liberty rights, because most libertarians believe that the basic liberties (freedom of conscience, self-ownership) cannot themselves be alienated. So libertarianism can be described as a form of egalitarianism--where the it is liberty that must be equally distributed.

The Equality-of-What Debate One of the most interesting debates in contemporary political philosphy has been a debate among egalitarians about the proper subject of equality. Suppose you are an egalitarian. You believe that each person should recieve an equal share of whatever is truly valuable. The question is: what is it that should be divided equally?

One possibility is "wealth and income." That is, we might believe that each person should be entitled to the same annual income. That answer becomes problematic, however, because different persons have different needs. Suppose that strict equality of income would produce a share of $20,000 per person per year. You are young and in good health, and can do quite well on that sum. I am elderly and in poor health; $20,000 per year will not even pay for the medical care necessary to sustain my life.

Here is another possibility. We might aim for equality of "welfare." Of course, we would need to define welfare, and that's a tough job. Let's assume that welfare is a subjective state, produced by the satisfaction of preferences. Equality of welfare might require substantial disparities in the distribution of resources. Those who are ill or developmentally disable might require a larger share of resources to produce an equal share of welfare. Even that might be problematic. For example, those with really severe needs might require enormous resources--the possibility of very expensive high technology medicine has hightlighted this possibility.

There is, however, another problem with equality of welfare. Suppose that you have simple tastes, and I have expensive tastes. You are happy with a modest house, simple food, and vacationing in the countryside. For me to achieve the same welfare level, I need a personal Gourmet chef, the finest wines and caviar, a mansion, and vacations at the Ritz in Paris. It seems quite odd to say that distributive justice requires that I get more resources than you, simply because my tastes are more expensive than yours.

I think you can alreay see how interesting and exciting the equality-of-what debate can be. Let me just mention some additional moves, and then stop. Another step would be to introduce the idea of equal opportunity. Thus, we might decide that it is not "equality of welfare" but "equality of opportunity for welfare" that should be the criterion for distributive justice. Another important theory, associated with the economist Amartya Sen focuses on the "capacities for valuable functionings" as the subject of equality.

Conclusion This is another Lexicon entry that is both too long and too short. Too long because it is a bit much to swallow in one quick read, but too short because the topic of distributive justice requires many multiples of the words devoted to it here--for even a short treatment. Nonetheless, I hope I have provided enough of an introduction to get you thinking!

I've included a short bibliography and some links to other resources on the Internet!

Bibliography

Ackerman, Bruce, Social Justice in the Liberal State (1980)

John Locke, Two Treatises of Government Student edition (Cambridge Texts in the History of Political Thought) (1988)

Robert Nozick, Anarchy, State, & Utopia (1974)

John Rawls, Justice as Fairness: A Restatement (2001)

John Rawls, A Theory of Justice (1971)

Jean-Jacques Rousseau, 'The Social Contract' and Other Later Political Writings (Cambridge Texts in the History of Political Thought) (1997)

Links

Fred D'Agostino, Contemporary Approaches to the Social Contract, Stanford Encyclopedia of Philosophy

Ann Cudd, Contractarianism, Stanford Encyclopedia of Philosophy

Julian Lamont, Distributive Justice, Stanford Encyclopedia of Philosophy