An Information-Production Theory of Contract Law

Contract law affects behavior not just directly, by ordering damages, but also indirectly, by providing information on how the parties to the dispute behaved. Information from litigation can then help third parties decide whether to do business with the disputants going forward. Contract law thus affects behavior by shaping reputations and facilitating market discipline. This Article examines contract law's liability standards, defenses, and remedies doctrines from an information-production perspective, and generates the following three contributions. First, the information-production perspective clarifies an efficiency-based justification for the stark divide between contract liability (strict liability) and tort liability (negligence). A negligence regime comes with higher administrative costs relative to strict liability, but also with the promise of more granular information on how the parties behaved. In torts, the informational benefits of negligence over strict liability are pronounced and often justify its higher administrative costs. In contracts, by contrast, strict liability often comes with distinct informational benefits of its own, producing information on parties' tendency to overpromise. The Article spotlights the surprisingly common contractual contexts where strict liability produces more reputation-relevant information than negligence, as well as contractual contexts where the informational benefits of negligence are too marginal to justify its higher administrative costs. Still, in many other instances, learning that the promisor overpromised in the past is not necessarily indicative of the likelihood that she will overpromise in the future. This is where the Article's second contribution comes in, exploring when contract law veers from its fault-free baseline to probe the parties' effort, preparedness, technological know-how, and integrity. By applying the information-production perspective to contract law's "islands of fault," the Article revisits time-honored puzzles, such as the "inverted hierarchy" of contract interpretation, the intractability of excuses, and judicial hostility toward liquidated damages clauses. The Article's final contribution is in outlining concrete policy implications. Recognizing that contract litigation subsidizes the production, certification, and diffusion of information carries important lessons for regulators, such as when to allow mandatory arbitration provisions; for judges, such as when to grant protective orders or rights of action for nominal damages; and for academics, such as how to assess the optimality of private ordering. It also puts a thumb on the scale against recent calls to personalize contract law. Tailoring different default rules to different contractual parties would hurt the ability of market actors to compare between potential contractual partners, thereby dampening reputational discipline.