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Vanderbilt Law Review

First Page

221

Abstract

In a complex economy, many business transactions take place sequentially-one party performs in part or in full before the other side executes its side of the bargain. Sequencing has many advantages, but it creates an unfortunate incentive. Having received its benefit from the bargain, the party who is to perform last may be tempted to renege on its obligations. Law and economics scholars often describe the conduct of a reneging party in these situations as "opportunistic." The reneging party, perceiving an opportunity to increase its gain, yields to temptation and refuses to perform. The law of contract helps to diminish the danger of opportunism by providing assurance to those performing first that their contracting partners can be held accountable if they renege. Accountability reduces the risk of entering business transactions and facilitates an atmosphere of confidence conducive to exchange.

Recently, scholars have explored the dangers of opportunism even after a contract is formed. If performance under the contract requires one side to invest in assets specially tailored to the transaction, the other side may be tempted to exploit this postcontractual situation by renegotiating the original terms to capture more of the bargaining surplus.' The same postcontractual opportunistic incentives exist when one side becomes dependent on unique skills or knowledge acquired by the other side after performance has begun.

This scholarly interest in postcontractual opportunism has not extended to the precontractual stage of business dealings. Law and economics scholars have assumed that parties in the precontractual stage are not likely to invest heavily in contract-specific assets and that the costs of finding suitable substitutes for performance are relatively low. More traditional doctrinal scholars likewise have failed to explore the concept of opportunism in their analyses of precontractual legal regulation. Both groups' approaches reflect traditional doctrinal distinctions, which sharply differentiate between precontractual and postcontractual dealings.

This Article challenges the assumptions of law and economics scholars regarding precontractual opportunism and seeks to fill a significant gap in the doctrinal analysis of commercial negotiation. First, the Article argues that the dangers of opportunism arise in the precontractual stages of business relations more frequently than law and economics literature has recognized. Opportunism often is more subtle in initial negotiations than in long-term contracts, and precontractual losses usually are more modest than those in the postcontractual cases. Nevertheless, a case survey reveals recurring fact patterns that point strongly toward the presence of opportunism in the initial negotiation of agreements.

Second, as a normative matter, the Article posits that legal doctrines regulating the precontractual stage can be made more precise and effective by directly introducing the concept of opportunism into the law. Third, the Article argues that regulation of precontractual opportunism is appropriate because opportunistic behavior during bargaining undermines one of the fundamental psychological conditions for the successful coordination of complex commercial transactions--interpersonal trust." Social psychologists, sociologists, economists," philosophers, and legal scholars all have recognized that trust is central to the efficient coordination of human goals. Once trust is established, commercial parties are better able to take risks that are necessary to coordinate transactions." Without trust, parties must resort to costly mechanisms such as simultaneous exchanges, precontractual contracts, or deposits to reduce suspicion of one another's motives to manageable levels. If these mechanisms are unavailable, parties may forego transactions altogether.

Until now, scholarship regarding the relationship between law and trust has been lacking. Legal economists have discounted trust in their analyses of legal regulation. At the opposite extreme, more traditional scholars have treated trust as a self-evident necessity of commercial dealings without examining the social psychological mechanisms for creating and maintaining trust. This Article addresses the shortcomings of both law and economics theorists and traditional scholars. It does so by exploring theoretical and empirical research on trust from the fields of sociology and social psychology and linking that research to the judicialy imposed legal penalties for precontractual opportunism.

Part II of this Article first discusses and defines commercial opportunism. Part II then describes the landscape of complex commercial negotiations. By exploring the wide variety of doctrines that courts have manipulated to compensate victims of precontractual opportunistic conduct, this section demonstrates that transaction-specific investments are common in complex negotiations. Part III explores why precontractual opportunism is socially and economically undesirable. Part III examines sociological and social psychological literature on the dynamics of interpersonal trust and asserts that precontractual transaction-specific investments are part of a vital trust-building process that undergirds many commercial relationships. Part IV looks at the role of law in supporting the construction of trusting commercial relationships. After analyzing nonlegal methods of deterring opportunistic conduct and reviewing the costs of legal intervention, Part IV concludes that legal rules proscribing opportunism in negotiation are justified as a means to reinforce and support the process of building trust. Part IV then extends this analysis by suggesting a new cause of action to improve deterrence of precontractual opportunistic conduct. Part V concludes with a summary and a suggestion for further research.

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