The Anti-Theoretical Nature of Civil Law Contract Scholarship and the Need for an Economic...

8/12/2019 The Anti-Theoretical Nature of Civil Law Contract Scholarship and the Need for an Economic Theory_Aristides Hatzis

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The Anti-Theoretical Nature of Civil Law ContractScholarship and the Need for an Economic Theory

Aristides N. Hatzis

Abstract

The absence of theories developed for Roman law and the absenceof grand theories in Civil contract law scholarship were outcomesof a particularistic approach to the problems created by the defi-ciencies of markets and driven by the need for the construction of a

legal framework conducive to economic progress. The generation ofefficient results by Civil law through the selection of efficient rulesand standards was completed over the course of several centuriesand stabilized after the great codifications. Common law had forcenturies attempted to develop a similar construct that would bestable enough to facilitate economic relations. Borrowing ideas andsolutions from Civil law was the easy way out. Despite the nu-merous legal transplants, the Common law fought hard to preservea false independence and a parallel dilapidated coherence by build-ing unified, conclusive, but dogmatic theories. The mimicking of

Civil law has led to some efficient solutions, but with many islandsof inefficiency trapped in the sea of rigid theories (bargain the-ory, privity, etc.). On the other hand, Civil law scholarship andpractice has found it increasingly difficult to respond to the fast-changing economic circumstances. For the first time in history,Lecturer of Philosophy of Law & Theory of Institutions, University of Athens(LL.B. 1989, LL.M. 1993, Aristotle University of Thessaloniki, Faculty ofLaw; LL.M. 1994, J.S.D. 1999, University of Chicago Law School). An earlierdraft of this paper was presented at the 14thAnnual Conference of the EuropeanAssociation of Law & Economics held at Barcelona, September 4-6, 1997. Iwish to thank the participants for their helpful suggestions, as well as Prof.

Katharina Pistor and Dr. Aspasia Tsaoussis. Thanks are also due to the manymembers of the Legal Studies Network (SSRN-LSN) who sent me their com-ments and related work. Email: [email protected]. Copyright 2003 by Aris-tides N. Hatzis.


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Hatzis: The Anti-Theoretical Nature of Civil Law ContractScholarship and the Need for an Economic Theory

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economic relations have become so complicated that it is impossi-ble for a judge endowed only with common sense to solve prob-lems created by the dysfunctions of markets. Economic expertise isnot only helpful, but also required. A responsive economic theoryof contract law is almost imperative if Civil law is to continueplaying the role that it has successfully performed for centuries:providing the legal framework that helps the economy function.

Table of Contents

1. The Absence of Theory: Civil vs. Common Contract Law1.1. Too Much Theory or Too Little Certainty?1.2. The Efficiency of Roman Law and of Contempo-

rary Civil Contract Law

2. Economic Analysis for a Civil Contract Law2.1. From the Absence of Theory to the Neoclassical

Consensus2.2. The Application of Economic Analysis to Greek

Contract Law: Problems and Considerations2.3. Contract Law and Distributive Justice

3. Conclusion

4. Bibliography


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Commentaries on Law & Economics, Vol. 2 ( 2002) 3

What the Romans did not have were treatises on thelaw of contracts in general. We have them to superflu-ity. But then our day is much given to Total TheoriesWhich Explain Everything (Except What Doesn't Fit).

Tony Weir (1992: 1646)

1. The Absence of Theory: Civil vs. Common Contract Law

1.1. Too Much Theory or Too Little Certainty?

I. A monograph was published in 1997 under the title The

Richness of Contract Law by the well-known American contractlaw scholar and Professor at Cornell Law School Robert Hillman.The subtitle of the book, An Analysis and Critique of Contempo-rary Theories of Contract Law refers to a number of theories de-veloped in the Common law world (and especially in the UnitedStates) on contract law, a field of law ironically declared dead threedecades ago (Gilmore 1974). However, in this paper, we will bediscussing neither the thesis of the said book

1 nor the problem of

the life or death of contract.2

We will rather be dealing with a question that is quite dis-

turbing for European scholars who comparatively approach Ameri-can Common law, and that arises often as they browse through thevoluminous literature on the theory of Common contract law of thepast one hundred years (see mainly Hillman 1997, but also Barnett1984 and 1989, Rakoff 1996 and esp. Cheffins 1999). This ques-tion is the following: Why isn't there a similarly rich literature or a

1 [O]n the whole, contract law suitably promotes the formation and enforce-ment of private arrangements and ensures some degree of fairness in the ex-change process. Moreover, contract law largely succeeds because it is the product

of the legal system's reasonable and practical compromises over conflicting val-ues and interests. (Hillman 1997: 2).2But see Farnsworth (1992) and also the symposium on The Death of Contractin 90Nw. U. L. Rev.1 (1995).


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similar number of theories developed for civil contract law?3

Whatthis question calls attention to is the absence of contemporary

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grand theories (cf. Gazes 1995: 36 n.59; 1997), that is, theorieswhich purport to describe, interpret and even modify contract lawin congruence with major philosophical, sociological, historical, po-litical or economic theories and which claim universality. By un-dermining the formalistic mentality that permeates law as a sup-posedly autonomous discipline, grand theorizing has the potentialof transforming legal theory from an anti-theoretical, parochial, in-terpretative technique into a science of social control.

If we look over the impressive literature published on con-tract law over the last two decades in the numerous Common law(especially American) journals and law reviews, we will discoverthat the purely doctrinal studies have been confined to the low-ranking journals and universities, to the developments and sur-veys of the law sections and to the comments and notes of stu-dent law review editors. Nearly all the well-known American con-tract scholars (and there are many) can be easily categorized ac-cording to their adherence to a specific theory, most of them beingeither neoclassical

5

or economists.6

All of them discuss broadly

3 According to Gazes (1995: 20, n.20 and 26, n.32), codification symbolizesthe end of law's development (or at least of its flourishing). For the problemsrelated to codification in the field of contracts, see generally Hellner (1990) andLontai (1990). See also Ktz (1983).4 Before World War II, and especially in the era of the major codifications, asignificant but dated discussion had taken place in continental Europe (esp.Germany). The work of Friedrich Carl von Savigny's historical school andGeorg Friedrich Puchta's conceptual jurisprudence (and also the less influential,more liberal and with no essential differences thought of Thibaut and Welcker)are examples of theoretical discussions that are absent today in continentalEurope. See mainly Reimann (1990) and Whitman (1990), and also Reimann(1991), Klenner (1989), Ruckert (1989), Herget & Wallace (1987) and Joerges

(1994).5 When applied to contract law theory, the term neoclassical signifies some-thing quite different from neoclassical economics, a term widely used to de-scribe mainstream economics. See Heijdra & Lowenberg (1988), Lowenberg


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theoretical issues, even when they set out to solve particular doc-trinal problems (cf.Cheffins 1999: 199-200).

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(1990), Medema & Samuels (1996), and D'Autume & Cartelier (1997). How-ever, the similarities go beyond the mainstream status. I would characterize theneoclassical theory of contracts as a rather amateurish attempt on the part of con-tract scholars (in Common law under the legacy of equity and in Roman Civillaw of ius praetorium) to keep in touch with the developments of economictheory after World War II (i.e. economic neoclassicism) rather than to socializecontract law. This is mostly true for the U.S.A., but also for Europe. See Hatzis(2000c).6 From an ongoing citation study on American contract law which I am cur-rently conducting, some preliminary findings are characteristic: In over 250 con-tract law articles, books or chapters most of which have been published after1980, the scholars with more than fifty citations are [in alphabetical order, sincethe findings are preliminary and although there is a vast disparity of almost 140citations between the first scholar (190) and the last]: Patrick Atiyah (Neoclassi-cal), Randy Barnett (Consent/Libertarianism), Ronald Coase (Economics/Neo-Institutionalism), Arthur Corbin (Neoclassical), Melvin Aron Eisenberg (Neo-classical), Richard Epstein (Libertarianism/Economics), Grant Gilmore (Neo-classical/Death of Contract theory), E. Allan Farnsworth (Neoclassical), LonFuller (Neoclassical), Duncan Kennedy (CLS), Friedrich Kessler (Neoclassical),Anthony Kronman (EconomicsNeoclassical), Stewart Macaulay (Relational-Empirical-Sociological), Ian Macneil (Relational), Oliver W. Holmes (Classi-cal), Richard Posner (Economics), Alan Schwartz (Economics), Robert Scott(Economics), Michael Trebilcock (Economics), Samuel Williston (Classical).The authors who immediately follow have also been heavily influenced by thetheory of others or have formulated theories of their own (Calabresi, Feinman,Fried, Friedman, Goetz, Horwitz, Leff, Llewellyn, Williamson, etc.). Belowthem on this list, there are about 20 other scholars with more than 25 citations,the less theoretical among them being Robert Hillman, Robert Summers andRichard Speidel, who are of course not innocent of theory! The first three bookscited are (in alphabetical order): Fried's Contract as Promise, Gilmore's The

Death of Contract and Posner's Economic Analysis of Law. The treatises ofCorbin and Williston follow. The first four articles are (in alphabetical order):Coase's The Problem of Social Cost, Epstein's Unconscionability, Fuller &Perdue's The Reliance Interest in Contract Damages (cf.Barnett 1995: 3) andMacaulay's Non-Contractual Relations in Business. Any comments are redun-dant.7 In a broadly discussed and much-disputed essay, Judge Edwards accused con-

temporary American legal theory of being impractical and overly theoretical,thus neglecting the two important functions of the law school: to teach studentsthe black-letter law and to train ethical practitioners. See relatively the reactionsto his essay in the Symposium (1993), esp. Posner (1993) (even though much


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The most typical example of this approach is American con-tract law, where the battle of the theories is worse than the battleof the forms (cf.Gordley 1991: 230 and Cheffins 1999: 202-206).However, in other Common law countries, the situation is notmuch different. For example, in England, theories like classical bar-gain theory and doctrines like privity are often so rigidly appliedthat they defy even common sense itself (see generally Collins1993; 1999).

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On the other hand, contract scholars in Civil law countriesadopt a very different approach (see generally Merryman 1990).

The great majority of studies are purely doctrinal, there are veryfew references to philosophical, economic or other theories (andwhen there are, they are largely outdated) and the topics are ex-tremely restricted, since the discussion on many issues seems tohave come to a conclusion and the interpretation of the statutesappears to be exhausted.

9

With the exception of certain new is-sues of some interest, like collective bargaining agreements, stan-dard form contracts and electronic commerce, the rest of the lawreview articles are analogous to their counterparts in the low-ranking American law reviews and the specialized ABA journals.

Why is there such a marked difference? What is the reasonfor this almost total absence of theoretical discussion on contract

of the scholarly output is trivial and ephemeral, this is the unavoidable price ofa body of creative scholarship that has more practical relevance and value as the-ory compared to the doctrinal formalistic scholarship).8 In the major English and Canadian law journals, there is also an ongoinglively theoretical debate. See also the contents of the AustralianJournal of Con-tract Law, the only specialized journal in the field. See particularly Cheffins(1999:passim, esp. 200-202).

9This is also true of treatises. The new editions do not contain any significantchanges. They usually have just more cases to report (supporting a particularinterpretation) and new law review articles to cite, or a more detailed treatmentof new developments to include.


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in Civil law countries? How can we account for such stagna-tion when there is such intellectual orgasm in the Common law?Are theoretical problems considered resolved in continentalEurope? Is there an indifference towards theory and a predilectiontowards results in the Civil law countries, or is it just technicalconservatism? Or is civil contract law dead? Killed not by its twoimplacable enemies, torts and restitution, but by its own children(commercial law, labor law, corporate law, insurance law, antitrustlaw, consumer protection law, law of sales, etc.) that have grownimmensely by eating the flesh of their father?

II. All of the above are more or less true. Contract law inCivil law countries is not what it used to be. However, it remainsthe core of any Civil code (jus commune), the model of most legalrelationships and of course the basis of the Law of Obligations(and, in some jurisdictions, of the General Principles of Civil Law).In addition, it seems that a renaissance of contract law has occurred

10To be fair, there is some theoretical discussion on contract law; however, itis rather occasional and restricted to the journals specializing in legal theory and

philosophy of law and is usually undertaken by the scholars who have the rela-tive tenure (professors of philosophy or sociology of law). Their debate concerns

mainly themselves, since the overwhelming majority of legal scholars do nottake part in this dialogue, because they consider Justice or Fairness as separatefrom positive law and they regard philosophy of law as distinct from the law'sdogmatic elaboration. This is a result of the increasing specialization and segre-gation within Civil law scholarship. Professors of philosophy of law cannotteach contracts (or vice versa) and they are usually supposed to occupy them-selves with the great philosophical problems (what is law?) rather than withthe application of legal theory towards solving particular doctrinal problems thatare considered to lie within the territory of doctrinal scholars. In turn, doctrinal-ists, occupied with the practical problems of interpretation, see the broader phi-losophical discussion as irrelevant, if not completely worthless (for similar ob-servations but different conclusions, see Gordley 1991). Thus, leafing throughthe various specialized and general Civil law reviews, one can find references,

presentations, even critiques of particular theories developed in the United States

or elsewhere, but there is little chance of seeing such discussions in the contextof particular legal questions (of course, with a few exceptions). The situation hasslowly started to change after the emergence of Law & Economics in Europe andthe challenges it has posed to mainstream scholarship.


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in the last decade, for two reasons: (a) the triumph of the free mar-ket and capitalism in Europe-at-large which led, in Eastern Europe,to a drafting or revision of civil codes (esp. contract and propertylaw) that are better-suited for free market economies and more con-ducive to economic development (Ostas 1992; Ostas & Leete 1995and Rubin 1994; 1997; cf.Atiyah 1995: 27-34), and (b) the growingconcern of the European Union for the unification of European pri-vate law in general and contract law in particular, as well as thetrend toward the internationalization of contract law (Farnsworth1990: 227-230).

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Therefore, European contract law is not dead. It is wounded,but alive and it seems that it has a good chance of recovery. How-ever, the continuing absence of general theories developed inEurope or influenced by the ones developed in Common law do-mains seems puzzling for Common law scholars, until they realizewhat the most plausible explanation of this phenomenon is: in Civillaw there is no need for theories since the legislator, mainly throughthe codes, has proclaimed what the law should be and the judge is(supposedly) a mere interpreter, useful only for accommodatingtrivial twists of facts. In such a static universe, where is the need

for theory?

11See esp. Lando & Beale (1995), Hondius (1989; 1994a; 1994b), Hartkamp etal. (1994), Hartkamp (1998), as well as the papers in the Symposium (1997).For international developments towards unification, see also Kozyris (1989),Viscasillas (1996), Honka (1996) and the Symposium (1995) on TheUNIDROIT Principles of International Commercial Contracts and Hartkamp(1994) for a comparison of the UNIDROIT and European law principles of con-tract law with CISG. See also Ruston & Works (1980), Bennett (1980), Wil-liams (1986) and Lando (1987) on the 1980 European Community Conventionon the Law Applicable to Contractual Obligations. But see the pessimisticremarks by Horlacher (1994). More generally, on the problem of the unification

of national laws, see Gazes (1997: 41-67, esp. 59 n.109). Sykes (1999) is also askeptic concerning regulatory harmonization, preferring a legal system that toler-ates regulatory differences subject to legal constraints, and that relies on mutualrecognition where appropriate.


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By contrast, in Common law, theory is necessary even to-day, since there are no Codes (capable of offering not only solu-tions to particular problems, but also -and most significantly- aunified approach). The need for theories has evolved in Commonlaw (esp. at the end of the 19th century) in order to provide a senseof security to the contracting parties who did not place any trust inthe caprices of individual judges and were looking for a more objec-tive basis for their economic relationships (see generally Atiyah1979).

Common law has for centuries been (and today continues to

be) in the process of its formation and Common law judges havetried to resolve issues by borrowing ideas, rules, and even theories,from multiple sources (Roman law, Civil law, law merchant, Canonlaw, etc.).

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With the advent of the industrial revolution and thepressure applied by novel commercial relations, and society in gen-eral, judges and scholars increasingly felt the need to inject the lawwith a theory that would provide a sense of stability and securityto the contracting parties. The classical bargain theory that devel-oped and flourished in the 19th century was then considered (giventhe socio-economic conditions and the prevalent ideology of the

time) the perfect theory for a capitalist economy.

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12Despite the maxim (in Latin!) nolumus Angliae leges mutare. Above all, seethe prodigious work by Gordley (1990 and 1991) and also, for England, Nicho-las (1974), Simpson (1975b), de Zullieta & Stein (1990), Donahue (1992) andSeipp (1993). For the United States, see Helmholz (1992), Hoeflich (1992),Whitman (1987), Riesenfield (1989) and Joerges (1994). See also, more gener-ally, Helmholz (1990), Stein (1992) and Reimann (1993). The influence ofCivil law touches even upon Australian Common law (Ladbury & Paterson1997). In Greek bibliography, see Zepos (1937), but also Gazes (1997: 32-33,with citations to opposing views).

13For this era, see generally (among others) Lindley (1993), esp. on the impactof economic change on contract law (id. 13-25 and 281-295) (a capital-intensiveeconomy inevitably produces large concentrations of economic power thatthreaten contract's social utility).


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A typical characteristic of Common law theories, that is alsoa good illustration of our point, is the desperate attempt of Com-mon law scholars to prove that their theories and their approachesare not only better normative theories, but also perfect positiveones (Ulen 1996: 793). As a result, a rather strange phenomenonoccurs in Common contract law review articles: after the expositionof a theoretical framework, the rebuttal of opposite theories andthe discussion of several cases which are characteristic for theircompatibility with the theory expounded, the author examines anumber of controversial cases with the purpose of demonstrating

that, deep down, these irregular cases are compatible with histheory, despite the opposite wording or even outcome.14

Only in extreme cases is a decision characterized as forthrightwrong or (at least) opposed to the theory developed, and is conse-quently dismissed. Of course, another scholar may easily support atheory that is in diametric contradiction, and may interpret the de-cisions accordingly.

15 This need for an approval by the already

adjudicated cases (!) signifies the insecurity and the desperate needfor coherency in Common law and is telling of the definitive powerof precedent even today.

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This phenomenon of procrusteanism

in Common law theory leads, according to one of the leading legal14For a typical example (in otherwise excellent studies), see Yorio & Thel's(1991) general approach or Remington's (1999: 646) ambitious approach to thetort of interference: No hint of this approach is to be found in judicial opin-ions;yet it does such a remarkable job of explaining the outcomes of cases thatone can only suspect that it comes closer to describing the intuitions of judgesthan the judges' own explanations of what they are doing. [the emphasis isours].15See e.g. Hillman (1997: 60-74) and compare with Yorio & Thel (1991). Acharacteristic historical example of this problem is the famous scene betweenSamuel Williston and Arthur Corbin in a session of the first Restatementdraft-

ing committee, as described by Gilmore (1974: 62-63). See also the excellentobservations in Weir (1992).16For recent critiques of the Common law process, see Ulen (1996: 805-806)and Hillman (1997: 164-166); see also Gazes (1997: 33-34).


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historians and Common law scholars, A.W.B. Simpson, to a sort ofdoctrinal monism:

17[T]here has always in the common law been

a tendency towards a sort of doctrinal monism -there must be onetest for the formation of contract (offer and acceptance), one prin-ciple governing possession, one test for the action-ability of prom-ises. (Simpson 1975a: 325).

1.2. The Efficiency of Roman Law and of Contemporary

Civil Contract Law

I.In stark contrast with Common law's century-long struggle

for coherency, Roman law in continental Europe was so compre-hensive, successful,

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coherent (esp. after its elaboration by thePandectist school--see generally Whitman 1990, Coing 1989 andalso Gazes 1995)

19

and abstract, as to offer judges useful guidelinesfor the regulation of economic activities with no serious conflictswith the needs of economic life,

20

despite the age of the statutes.21

It

17Monotheorism for Weir (1992).18Most Roman institutions related to the law of obligations are still alive inall major European codifications. It is characteristic that the contemporary law of

sales in the continental legal systems is nearly identical to Roman law. For thereasons behind the success of Roman law, see generally Gazes (1995, esp. 19-29) and the citations therein.19Before the Pandectists, numerous scholars had elaborated on Roman law. InWestern Europe, Roman law was developed by the 12th-century Glossators, the14th and 15th centuries Commentators, led by Bartolus and Baldus, the 16 th-century Humanists led by Hugo Donellus, the late Scholastic, Spanish naturallaw school and the early modern Romanists (see generally Watson 1981; Gord-ley 1990 and 1991, as well as Stein 1993) and in Southeastern Europe, by ahost of eminent Byzantine scholars for over a thousand years (see generally Pan-tazopoulos 1974i: 199-294; 1979ii: 79-167; 1979iii: 90-195 and Troianos1999).20According to Phourkiotes (1964: 30, n.1), Roman lawyers were particularly

interested in the relationship between law and economy and the consequences oflegal rules on economic life. Thus, the Roman Praetors and other Roman law-yers were often more interested in the efficient regulation of commercial rela-tions than in developing a conceptual or moral system.


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is characteristic that the history of contract theory developed byCommon law within the last two centuries was, to a great extent,the history of the adoption and development of concepts that werepart of Civil law's contract theory and practice since Roman times(or at least since the major codifications in Western Europe).

The codification of Roman law by Justinian and the subse-quent development of this law (see Watson 1981 and Stein 1993),always within the boundaries of the great codifications, and, at thesame time, the successful and uninterrupted application of Civillaw in continental Europe and elsewhere, has offered the contract-

ing parties in Civil law countries a stable, coherent and positive le-gal framework, including a set of default rules that they can bargainaround (and thus further develop) (cf.Mattei 1997: 207-208).

Its usage has also created a tradition of a particularistic elabo-ration of issues and economic relations, which is based not on acase-by-case treatment, that needs a general theory in order to re-main stable and coherent, but on a regulation of special types orcategories of contractual relationships

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by means of a unified set ofrules imprinted in the Civil codes. These rules have for centuriesbeen the object of further treatment, elaboration and improvement

by judges, scholars, and of course, the contracting parties them-selves. This fermentation process has shaped legal orders that aretime-honored and thus highly sophisticated. Therefore, it is no co-incidence that Roman law was a decisive factor for the creation of

21James Whitman has developed a theory according to which this compatibil-ity was to a great extent helped in the 19th century by the theoretical con-structs of a number of German professors of liberal political ideology, mainly of

Jhering. See Whitman (1990: passim and also 229-243). See also Rolland(1990: 143-145).22Alan Watson describes Roman law as comprised of numerous self-containedblocks (Watson 1981: 18-20).


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the first commercial societies in Europe and for the rise of capital-ism.

23

It is illustrative of the contribution of Roman law to the eco-nomic development and the modernization of European legal sys-tems that the enemies of Roman law in Germany attacked it as alaw that was rationalistic,

24commercial and materialistic (see

Whitman 1994: 228). In a series of papers and books, Prof. JamesWhitman has established the close relation between the reemer-gence of Roman law and the birth of the first commercial society inHolland. Its moral menace feature proved quite useful in the bat-

tle of commercial needs with the prevalent native Christian law,that was unsuitable for commercial development. According toWhitman, Roman law did not cause the rise of a new commercialmorality in seventeenth-century Holland; it helped justify the rise

23 For the relation of Roman law with commerce and its contribution to thecreation of the first commercial societies, see Whitman (1994 and 1996). Ro-man economy was essentially a market economy. According to Wacke (1993:2):

The ground rule of the Roman emperors with regard to private eco-nomic activity may be described (in line with Rostovtzeff and Heichel-heim, the Classicists of ancient economic and social history) as lais-sez-faire liberalism, which only sought to regulate to a limited extentthe production of mainly agrarian and household goods, as well as theirdistribution on the predominantly small-scale markets [...] The market-economy principle of free competition remained, by and large, undis-turbed by these state activities, which were important, but which re-mained peripheral to the general economic system.

As a result, its ius civile(as well as its ius gentium for its subjects) was devel-oped in order to meet commercial needs and to regulate an advanced commercialsociety and transactions (see e.g. Gazes 1995: 19; above n.19). See also the in-teresting concurring comments by Phourkiotes (1964: 2) and the citationstherein.24Watson (1981: 23) adopts Max Weber's logically formal rationality to de-scribe the rationalistic character of Roman law. For Trubek (1972: 730; also

cited by Watson), logically formal rationality operates through a highly logi-cal systemization, making the resolution of specific problems depend on proc-esses of specialized deductive logic proceeding from previously established rulesor principles.


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of a new commercial morality (Whitman 1996: 1845; see also Ko-schaker 1938).

25

II.The major codifications that started in the beginning of the19th century and ended in the early 20th century offered a mod-ernized version of Roman law,

26

especially under the sway of theGerman historical school (whose influence was greater than gener-ally believed

27

and which effectively connected law in books withlaw in action in the Continent). These codifications rendered thelaw more compatible, in certain respects, with the economic devel-opments of the period. Further, they were the product of an exten-

sive theoretical discussion and were greatly influenced by the socialand economic theories that prevailed at the time, which were notvery different from the present mainstream ones (Whitman 1994).

Following the tradition of Roman law,28

the new Civil Codeshave not espoused any particular theory, especially in the area ofContract Law (with the exception of a modified will theory for

25For a similar conflict that took place in Greece between the German-educated

proponents of Roman law (as taught by the Pandectists) and the advocates of thehistorical school who supported the preservation of the popular native Greekcustomary law, see Pantazopoulos (1945).

26 See mainly Zimmermann (1990). However, see Stein (1992: 1591-1594):The Roman law of the classical period, the first two centuries A.D. when itreached its highest point of technical development, is in many respects closer incharacter to the common law than it is to modern civil-law systems that are de-rived from Roman law. See also Stein (1993: 14). This is, to a certain extent,true, as Stein aptly demonstrates. But this similarity between classical Romanlaw and modern Common law is rather an indication of the immaturity of thelatter than a sign of the deviation of Civil law from its historical roots. See e.g.Gazes (1997: 33, n.30). See also Zepos (1937, esp. 473-474). This does notmean that the progress of Civil law since Roman times has consistently been animprovement process. See esp. Stein (1992: 1600-1601).27 See Whitman (1990: 200-228), Joerges (1994), Ruckert (1989), Klenner(1989) and also Ascheri (1996) and Gazes (1995: 34-35). The influence of the

historical school on the drafting of the German Civil Code was also definitivefor other European legal systems.28For Dawson (1982: 596), problem solving rather than high-level speculationwas the great skill of Roman jurists (as this is evident in the Digesta).


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contract formation, that was essentially an idealistic/liberal coverfor the actually dominant objective theory of consent, itself a laterdevelopment, but under the influence of Roman law's general ap-proach).

29The main concern for the codifiers was to solve all major

theoretical and practical problems30

by choosing the best possiblesolution for the welfare of the parties (see Ktz 1983), as this wel-fare was perceived under the liberal ideology of the day, which wasalso heavily influenced by Christian ethics (esp. equity), and cer-tainly within the boundaries set by the rules, standards and princi-ples that had proven successful for many centuries.

Consequently, in the Civil Codes one can find answers to al-most all the doctrinal and theoretical problems which have preoc-cupied and still preoccupy Common law theory (e.g. the basis ofcontract, the rigidity of the privity doctrine, the enforcement ofpenal clauses, liquidated damages or third-party beneficiary con-tracts, the choice between different types of damages and specificperformance, the problem of quasi contracts and unjust enrichment,the puzzle of precontractual liability, the controversial unconscion-ability defense, the nature of the good faith requirement, thecompensation paradox, the differentiation between commercial im-

practicability with other similar cases of frustrations of contract,etc.). Civil law thus provided definitive and authoritative solutions29 For the theory of consent as the covert basis of contractual obligation inGreek contract law, see Hatzis (1999a: 134-169).30 Roman lawyers cared little for the sweep of general principle. Theirs

was a nominalist world of particulars, principally particular types oftransactions [...] The Romans eschewed any effort at system orwide-ranging organizational principle. This left them at something of aloss when questions arose as to why certain rules had the content theydid. Little in Roman law was explained by reference to somethingmore abstract, something underlying the play of the rules. The onlyresponse was That is the way we do things. [Patterson 1991: 1433,

the emphasis is mine].See also Gazes (1995: 23): [Romans] [u]sed concepts, solutions and institu-tions only for practical needs and never for theoretical purposes. See, however,a different approach by Watson (1981: 83-84).


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to all the aforementioned problems, but without restricting the par-ties by heavily regulating their contract.

In addition, most of the clauses in Civil Law Codes (esp. inthe Law of Obligations books) are default, non-mandatory (op-tional) rules. The Codes routinely endow the judges with broaddiscretion by way of a series of general standards (see e.g. recentlyHartkamp 1992). Regardless of the practice of Civil law judges,their independence is not similar in nature to that of their Commonlaw colleagues, since they need not be creators but interpreters ofthe law.

31Consequently, there is no urgent need for unifying theo-

ries resembling those that were developed in Common law, sinceCivil law judges are not expected to create law in the manner re-quired of Common law judges.

This particularistic approach of Civil Law has proven quitesuccessful for a long time, if we judge by the absence of major in-tellectual controversies among Civil law scholars (at least in thearea of contract law), similar to those taking place in Common law.Since this is a phenomenon common to nearly all European Civillaw systems, we could safely say that it is not the outcome of aconsensus based on intellectual laziness, conservatism or igno-

rance, but the result of (a) the lack of major doctrinal problems cre-ated by the rise and fall of opposing philosophical paradigms, (b) aparallel absence of major economic or social distortions created b ythe application of rigid legal theories, and finally (c) a shared com-mon-sense pragmatism (a Roman law legacy) that has guided inter-pretation as a technical skeleton key.

32

31 See however Zepos 1967: 931, for the creative and law-creating efforts ofthe Greek judge. See also below under 2.2.IIb.32See characteristically the views of Ernst Cohn, a London barrister practicingin both Germany and England, who wrote:

A practitioner who has grasped the rules of the first book of the Ger-man Civil Code and those of the first part of the second book isthereby alone well equipped to deal satisfactorily with an astonishinglylarge number of everyday problems. A question which would require a


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An indication of the superiority of Civil law, especially inthe field of contracts, is that over the last two centuries, as we im-plied earlier, Common law has incessantly copied the institutionsof Civil law.

33 However, even today, Common law and Civil law

have many dissimilarities in the field of contract law. These shouldnot be exaggerated, since the similarities between them are numer-ous and more important,

34

given the tendency of Common law toborrow solutions from Civil law (but see Mattei 1994a: 199). Nev-ertheless, it would be interesting to explore the differences in thelight of economic analysis, in order to test the success of both sys-

tems. Which system of law is more efficient in those areas wheresuch differences exist?III. We have elsewhere (Hatzis 1999a; 2000b, 2002b) ex-

plored five areas where there are marked differences between Civiland Common law. These areas are contract formation, the enforce-ment of liquidated damages and penal clauses, third party benefici-aries, frustration of performance and efficient breach. We usedAmerican contract law and Greek contract law as typical examplesfor our study. American law is the most important Common law

common law practitioner to search in books of reference for one or sev-

eral quarters of an hour could be solved by his Continental colleaguecompletely satisfactorily in as many minutes. (Cohn 1960: 586).

Similarly, in a recent letter to the editor from a retired American lawyer livingin France: French contracts tend to be extraordinarily short and simple byAmerican standards [...] This is partly because parties to business contracts usu-ally don't try to anticipate every situation that could conceivably arise but arecontent to abide by the Code Civil. (Himel 1997: 5). See also Pound (1942:42). However, see Hatzis (1999a: 21-47 and 2000c).33 E.g. [T]he influence [of the Napoleonic Code Civil] in England and theUnited States was far from superficial but reached deep and long lasting layersof the law (Mattei 1994a: 202). See also Schwartz (1956).34It is, however, becoming more and more obvious today that the prevailingidea of the English Common law as constituting an entirely autochthonous

achievement is a myth. For in reality, England was never entirely cut off fromcontinental legal culture. (Zimmermann 1994: 220). See generally, Zepos(1937), Merryman (1981), Bell (1995) and Mattei (1997: 77-81); see also Wat-son (1990: 248).


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18

system in the world and Greek law is one of the most typical Ger-man-influenced legal systems rooted in Roman law.

35

As our research showed, the solution provided by the Civillaw systems in these five areas where major differences are ob-served, is more congenial to the one advocated by economists asthe most efficient one.

36 The particularistic (casuistic) and prag-

matic approach of the Roman and Civil law (Zimmermann 1990:921) has proven to be more efficient

37 than that of the rigid theo-

retical Common law, whose reluctance to adopt all the successfulsolutions given by the Civil law (although it has already adopted

most of them)

38

is primarily due to the futile attempt of Common35The Greek Civil Code took effect in 1946 and was drafted during the 1930s

by scholars who were greatly influenced by German law. From 1821 whenGreece was liberated from the Ottoman yoke until 1946, Byzantine law (essen-tially the Corpus Iuris Civilis) was the applicable Civil law with few majormodifications by special laws. See Zepos (1946), Maridakes (1959), Watson(1991: 87-88), Zweigert & Ktz (1992: 161), Yiannopoulos (1996) and Hatzis(1999a: 1-21).36See generally Hatzis (1993) for the applicability of positive economic theoryand even of the normative function of the wealth-maximization principle inCivil law countries. See also Mattei (1997: 179-199). However, the prevalenttheory in law & economics maintains that the Common law process is the pri-

mary reason for the generation of efficient rules. See characteristically Rubin(1977; also 1994: 9-11) and the work of Richard Posner in general, mainly histreatise Economic Analysis of Law (Posner 1998b; also 1980). For a contraryview, see Backhaus (1989). For the official Chicago school statements of theefficiency of tort law, see Landes & Posner (1987), and of corporate law, seeEasterbrook & Fischel (1989), as well as Ribstein (1999).37Of course, the terms are relevant and they are applicable only in the contextof the relationship between Civil and Common law. But see Georgakopoulos(1997, esp. 485-487).38American law could not resist the allure of codification. The Uniform Com-mercial Code is the prime example. Karl Llewellyn, the U.C.C.'s main author(and a great enthusiast of the Common law process) believed (in a New Dealspirit) that commercial law rules are best created by administrative agencies or

specialized law reform organizations (Schwartz 1997: 12, 22-27). He also main-tained that the rules of contract law should come at least in part from outside theCommon law system in order for them to be efficient (Schwartz 1997: 31). Cf.Shavell (1987: 277-290). Restatements have also started to assume the role of


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law scholars to create unified theories, based not on economic effi-ciency (the real and primary purpose of contract law),

39 but on

philosophical and moral ideals that are irrelevant to the parties'wishes and welfare.

This does not signify that Civil Law's underlying logic iseconomic (a feature that Judge Posner and other law & economicsscholars attribute to Common Law). But it does make the pointthat the long process from Roman Law times to the modern CivilCodes which we have briefly described above, and the paralleltesting of its rules by a host of legal scholars, judges and lay people

in diverse social and economic settings, have shaped institutionsthat regulate the market efficiently.40

Nevertheless, we will show that today even Civil law needs atheory. Using Greece as an example, we will discuss the attemptsof mainstream scholars to cope with its absence and will explorethe reasons for their failure to satisfy the aims of contract law, sug-gesting that the most appropriate theory is an economic theory forcodes or statutes (Barnett 1996: 528): Courts are increasingly treating the Re-statement as a statute. Judges typically look to the Restatement, rather than toeven very practical and accessible legal scholarship, to ascertain the prevailingcontract doctrine. They are unwilling to move beyond the safe-haven framework

it provides. More generally, see Calabresi (1982).39 For the definition of efficiency, we employ the Kaldor-Hicks criterion ofwealth maximization. For a policy to be Kaldor-Hicks efficient, those individu-als made better off by a new policy or change of policy, would have to be madesufficiently better off that they could compensate those who are made worse off,the compensation being potential and not actual (Harrison 1995: 34). See Kaldor(1939) and Hicks (1939) and also Posner (1992: 13-16). More generally on effi-ciency concepts, see Murphy & Coleman (1990: 182-187).40 Of course, this does not imply that countries with civil law systems arewealthier or more efficiency-oriented than common law countries. The evidencesignifies that rather the opposite is true. See esp. Mahoney (2000) (common lawcountries experienced faster economic growth than civil law countries during the

period 1960-1992; the difference reflects the common law's greater orientation

toward private economic activity and the civil law's greater orientation towardgovernment intervention). However, we believe that this disparity should ratherbe attributed to different cultural traditions and historical circumstances. Seebelow under 2.2.II.c.


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20

contract law, based on the currently mainstream neoclassical eco-nomics.

2. Economic Analysis for a Civil Contract Law

2.1. From the Absence of Theory to the Neoclassical Consen-

sus

As we emphasized in the first part of this paper, the Euro-pean Civil Codes have proven overall successful after many dec-

ades of constructive implementation. Their particularistic approachtowards contract law and the absence of rigidity contributed to thefacilitation of economic life and to the realization of the parties'wishes more successfully compared to Common law. This was theresult of a natural evolution of legal rules and practices that threwinto disuse a number of worthless institutions and insignificantformalities.

41 It was also the result of the judges' respect for the

principle of freedom of contracts and the absence of an active judi-ciary, similar to the one in the United States.

42

However, the essential devotion of legal scholars to the

spirit of equality, which is inherent in the freedom of contractsprinciple, inevitably raised concerns about genuine consent, aboutthe substance of the contract and consequently about the condi-tions required for the autonomous will to be freely and voluntarilyexpressed through contract (thus bringing about just but also trulyefficient results). Civil law scholars have increasingly focused on

41This process was precipitated by the struggle between the historical schooland Roman law, a struggle that resulted in the creation of a legal spontaneousorder, purified by the rationality of Roman law. See generally Klenner (1989).

42As we implied earlier, Civil law judges are active in developing the law, notchanging it. And they are always free from precedent. For relevant remarks, seegenerally Gordley (1981), Alivizatos (1995: 578-580) and Posner (1996c: 60-61).


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the problem of inequality of bargaining power in a contractual rela-tionship and of informational asymmetries (sometimes even theprotection of risk averse persons). This intellectual process has ledto theorizing that bears many similarities to the one undertaken byAmerican neoclassical contract law scholarship.

43

Therefore, we could characterize e.g. mainstream Greek con-tract theory as similar in many respects to the American neoclas-sical school of contract scholars. This movement from freedom tocontrol is clearly evidenced in Greek contract law, as this has beenconstructed by contemporary interpretation (Hatzis 1999a: 21-64).

According to Alan Schwartz (1986), this trend has changed the faceof contract law:Through such doctrines as unconscionability, contract lawtoday is attempting to perform its traditional function of in-suring justice in the marketplace, not by permitting people todo what they want to do, but by preventing them -in certaincircumstances- from doing what they have agreed to do.(Schwartz 1986: 108).

Schwartz successfully identifies the confusion plaguing American

(and for that matter Greek) neoclassical legal scholarship. Legalscholars cannot easily discern the real nature of the problem. The

43For an account of this development in American contract law, see Slawson(1996). See Hellner (1991) for a similar movement initiated in the context of theScandinavian legal realist school. See also Hillman (1997) and Sharma (1999),and in Greek, the very good historical introduction to the rise and decline ofcontract (spanning the period from ancient Greek law to Gilmore and Atiyah) byVelissaropoulou-Karakosta (1993). See also Macneil (1978) for an earlier andvaluable delineation. For an early (both chronologically and scientifically) andthus primitive attempt by Karl Llewellyn to apply economic analysis to theregulation of contracts (within the boundaries of early economic neoclassicism),see Schwartz (1997). Analogous attempts by Greek scholars and judges to use

economic analysis are also doomed to failure for similar reasons, that is, for lackof economic sophistication (see mainly Hatzis 2000c; cf. Schwartz 1997: 48-49). For Germany, see Pieck (1996) and for European law in general, seeBrownsword et al. (1994).


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22

critique towards the freedom of contract principle by Greek legalscholars aims mainly at three targets: (a) the problems created bythe initial inequality of bargaining power between contracting par-ties, (b) the problems created by the subsequent inequality of bar-gaining power (due to the sequential character of economic activity-performance), and (c) the distributive consequences of contract lawin general (see generally Papanikolaou 1991: 183-245). For Greeklegal scholars, the three aforementioned targets are one and thesame: the free market mechanism (as it is supported by contractlaw rules and especially by the freedom of contracts principle in

a society of inequality), that purportedly has devastating dis-tributional consequences for the weaker parties in transactions,since there is no perfect competition and the stronger contractualparties can easily impose the terms that are more favorable tothem.

44

However, this approach does not seem to differentiate be-tween the two essentially different aspects of the market mecha-nism, i.e. its distributive consequences and its inefficiencies.

45

Re-gardless of the distributional problems and the social consequencesof (even perfect) competition, contract law deals (and it should ex-

clusively deal) with problems created by free market failures, thatis, by inefficient markets. But for most Greek (and European) legalscholars, contract law can be used both as an instrument for cor-recting market failures and as an instrument of social justice(Stathopoulos 1999). We believe that this view is not only errone-ous, but also dangerous.

44See Hatzis (1999a: 34-38) for a more detailed presentation and many cita-tions to contemporary Greek legal bibliography.45 This does not imply that market failures do not have distributive conse-quences. However, the distributive consequences of perfect and imperfect compe-

tition are very different from a qualitative point of view, even for political phi-losophers. See Rawls (1971) and Nozick (1974) for the definitive treatment ofthe problem in liberal and libertarian political philosophy. See also Hatzis(1997).


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2.2. The Application of Economic Analysis to Greek Contract

Law: Problems and Considerations

In this paper, we are only interested in the first function ofcontract law (in how it deals with market failures), since contractlaw is ill suited for the second function, as we will argue in the nextsection. We contend that the economic theory of contracts, as thishas been developed by the proponents of economic analysis of lawover the past twenty-five years,

46provides the best general theory

and analytical tools for the interpretation of Greek contract law

(and any other Civil contract law, for that matter). 47 Virtually allthe principles of Greek contract law can be restated in economicterms (Posner 1990a: 361 and esp. Harris & Veljanovski 1986),without losing their normative implications (see e.g. Cooter & Ulen2000: 205-212). Hence, an economic analysis of Greek contract lawcould be successful for many reasons. Some of them are the fol-lowing:

46Mainly by lawyers, since for most economists, the concepts of contract lawwere terra incognitaand were considered the given institutional framework. SeeVeljanovski (1979 and 1982: 76-77) and also Romani (1986: 121-125). Eventoday, economists are more interested in contracts theory as part of the theoryof the firm analysis in industrial organization (Salani 1997), and/or as one ofthe methods of economic organization (the other two being regulation and verti-cal integration) than in the economic analysis of contract law as a collaborativeeffort by lawyers and economists to design efficient default legal rules and regu-lations (mandatory rules or rules of public policy in legal terminology) thatshould govern contractual relations. See characteristically Coase (in Kitch 1983:192): I have no interest in lawyers or legal education [...] My interest is in eco-nomics, Coase (1988) and the critique towards the mainstream new law &economics by Williamson (1996). See also Kronman & Posner (1979: 6, n.6and also 1979: 7: we were struck by the paucity of economic writings on con-tracts.).47 See e.g. Mattei & Pardolesi (1991) and Ostas & Leete (1995). Based on

similar arguments, Reinhard Zimmermann advocates a unified approach thatuses the common past as the most obvious, and natural, point of reference foranalyzing and understanding the development of modern law (Zimmermann1994: 222), an approach reminiscent of the historical school.


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ter:51

market transactions as cooperation mechanisms - that is, ex-change. Consequently, their collaboration is imperative for societiesas complex as ours, especially in their market element.

52

Accordingly, the problems of contract law are certainly legalproblems, but they are first and foremost economic problems. Thisis not the place to argue for the relevance of contract law to eco-nomic life in general or to support the more debatable assumptionthat economic considerations are far more important than the regardfor the integrity of any legal theory or idea in an area that is sodeeply interwoven with economic life. No one would deny that a

legal theory is tested to a great degree by its application within aparticular society; in our case, a theory of contracts is tested in themarket.

II.Although the economic theory of contracts has been de-signed for Common law systems,

53there is sufficient evidence of its

51Since buying and selling -and related transactions, such as leasing and bor-rowing, which are also governed by contract law- are quintessentially economic

activities, it would seem that economics should have something useful to say tostudents of contract law. (Kronman & Posner 1979: 1). In Greek legal bibliog-raphy, see the excellent discussion in Phourkiotes (1964: 5-6, 26-36, esp. 32).52The primary role of economic analysis is to explore the efficiency of the ex-isting (optional) default and mandatory rules and to propose new ones in casesof inefficiency. Any other role that can be assumed as a basic element in a moralor political theory will not be discussed here. But see Posner (1980, 1983: 48-115; 1990a: 353-392, 460; 1995a: 11-21, 403-404), for the most well knownexposition of such a normative theory and the subsequent distancing from itscontroversial original version, as well as Hatzis (1993).53 However, regardless of the now old-fashioned schism between Civil andCommon law, American intellectual leadership in Western law will be decisive,also taking into consideration the pervasiveness of law and economics in Ameri-

can legal theory, as this is illustrated in the mainstream textbooks, treatises,casebooks, as well as citation studies. See esp. Mattei (1994a: 203-218), Landes& Posner (1993) and also Polinsky (1989: 148). For the dominance of the Eng-lish language in legal science, see Gazes (1997: 65, n.126).


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26

relevance as a basis for the construction of similar theories for Civillaw systems.

54

According to a recent statement of the goals of economicanalysis by Judge Posner (1998a: 2-3):

The economic analysis of law [...] has both positive (that is,descriptive) and normative aspects. It tries to explain andpredict the behavior of participants in and persons regulatedby the law. It also tries to improve law by pointing out re-spects in which existing or proposed laws have unintended orundesirable consequences, whether on economic efficiency,

or the distribution of income and wealth, or other values.

To sum up:(a) An economic theory of contracts could become a guide for

the legislator who wishes to enact a statute that is as efficient aspossible, given the restraints posed by the other normative objec-tives of the particular statute. And it could be a perfect tool for thelegislator who aspires to create nothing more than an economicallyefficient contract law, leaving out the normative and distributiveconsiderations to be dealt with by taxation, or any other kind of

state legal and economic intervention. The transformation of theformer socialist countries of Eastern Europe is a typical example,since one basic concern for the new democratic regimes is the con-

54See e.g. Posner (1983: 101-102, 105-106). See the suggestions for an expla-nation of the implicit economic logic of Common law in Posner (1992: 254-255). Almost all of them are valid for Civil law (esp. 1, 3, 4) and, as we havesupported elsewhere, sometimes Civil law is conditioned by economic logic in

circumstances where Common law is not (Hatzis 1994; 1997; 1999a; 2000b,2002b). For views parallel to ours, see the arguments (although somewhat tenta-tive) by Goldberg (1989: x), Van den Bergh (1988; 1992), Cooter & Ulen(2000: ix-x) and Posner (1997a). See also Hatzis (1993).


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struction of legal institutions and, more particularly, the creation ofa contract law suitable for a market economy.

55

(b) In addition, we should here emphasize that judges play avery decisive role in Civil law systems, despite the mainstreamview in Common law typifying them as bureaucrats.

56

Althoughjudicial decisions do not constitute a source of law comparable tostatutory law, in practice they are considered de factoequivalent.

57

In Greek legal scholarship, there is an ongoing controversysurrounding the nature of judge-made legal rules

58and the relation of

stare decisis to custom. According to Papantoniou (1983: 43),

[t]oday the primary source for the creation of custom is the

55See Ostas (1992), Ostas & Leete (1995), Brietzke (1994), Hay et al. (1996),Jiang (1996), Rubin (1994; 1997), Butler (1998), Posner (1996d; 1997b; 1998c)and Hatzis (1999b). See also generally Easterbrook (1989).56 The prevalent view in the Common law world is that [t]raditionally thecivil-law judge is a fungible person, one of a group of anonymous, almost col-orless, individuals who hide their personality behind the collegiate responsibil-ity of the court. Their duty is to apply the written law, and the meaning of thatlaw is to be discovered from the writings of its academic exponents. (Stein

1992: 1597). Cf. Posner (1997a: 3-5). Although these remarks contain someelements of truth, they hardly do justice to the Civil law judge, especially in thecase of higher judges (of appellate and supreme courts). See e.g. Alivizatos(1995) (over the past twenty years the judiciary in Western Europe has taken onan increasingly significant role in national decision making processes), but alsoGeorgakopoulos (1999) for contrary views.57In Greek bibliography, see esp. the discussion in Papantoniou (1983: 45-49)and Papasteriou (1994: 27-31).58For the role of the judge in interpreting the Greek Civil Code and in legislat-ing within statutory limits, see the discussion in Bales (1940), Maridakes(1949: 214-217) and recently Ap. Georgiades (1996: 131). In the original draftof the Book of the General Principles, there was a section (unfortunately laterdeleted) that read: The Judge, in cases where there is no relevant rule in the law

or in the custom, decides (implementing the general principles of law) accordingto the rule which the legislator would have decreed if he could have foreseen thesituation. SeeDraft of the General Principles, art. 1. Similarly, see Zimmer-mann's (1994: 220 xiii) comments on the BGB.


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28

binding precedent that courts follow faithfully.59

The persistenceon judicial precedent, especially by Areios Pagos (Greece's Su-preme Court for private law) and the major appellate courts, certi-fies the existence of opinio necessitatis, that is a basic requirementfor the emergence of custom. If we take into consideration that un-der the mainstream view, a custom can modify or even revoke astatute under certain circumstances (Papantoniou 1983: 42 and esp.Vavouskos 1984: 44), we can fully grasp the extent of the (defacto) law-making power of judges in the Greek Civil law system,although this is in practice applied mainly in Areios Pagos and in

the major Courts of Appeal.

60

However, Stathopoulos (1995: 23) disagrees with the equa-tion of stare decisis with custom: In administering justice, [thejudge] implements the law, he does not legislate.

61

And he goes onto develop Fr. Gny's view of court decisions as introducers ofcustom:

62

Only if any constant practice of courts creates a sense of ageneral binding rule (opinio juris) in the citizens is a rule ofcustomarylaw generated. But the reason for the legal force ofthis rule, and therefore the source of production of law, is not

the court decision, but the custom. [italics by the author].

Nonetheless, the aforementioned theory does not result in a cur-tailment of judicial discretionary authority and law-making power,since judges are always free to pursue their own interpretations. In

59See also Papantoniou (1983: 45-46), and for concurrent views, Vavouskos(1984: 43-44) and Spyridakes (1985: 26). See also the opinion of Vathra-kokoiles (1989: 22), a Judge in Areios Pagos (then an Appellate Judge).60See e.g. Grammatikake-Alexiou (1993: 15) and Stathopoulos (1996a: 135-143, esp. 143) for examples from judicial practice.61

Stathopoulos (1992: 40-41) is not much friendlier to customs, stating thatthey are often conservative, outdated, biased and irrational. See also Stathopou-los (1979: 2 for customs in the law of obligations).62See also Stathopoulos (1992: 48-49 and esp. 54-55).


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any case, the original intent of the legislator as a guideline for statu-tory interpretation does not have the same authority in Greece as itdoes in the United States (see e.g. Papantoniou 1983: 57). Themainstream objective theory of interpretation holds that thepurpose of interpretation is the discovery of the essence of thelaw (or rather, of its ratio legis) and not the will of the legislator.The will of the legislator is superseded by the will of the enforcerof the law (Papantoniou 1983: 57). This is particularly true ofAreios Pagos and the major Courts of Appeal that can easily createcustomary law via binding precedent, and do so regularly (see gen-

erally Papasteriou 1994: 27-31). Consequently, the characteriza-tion of a particular judicial practice as custom has little practicalsignificance, because what ultimately matters is the verification thatthe practice already exists and produces legal results.

63

The single most important factor that determines the broaddiscretionary power of courts in Greece, and in the Civil law worldin general,

64is the existence of very general standards that leave the

judge with a vast territory over which to exercise (even legislative)power. This is particularly true of contract law, where there are agreat number of standards and concepts whose interpretation and

63See Ap. Georgiades (1997: 25-26), who discusses the role of judicial prece-dent in the creation of law, and also Gazes (1997: 62-63, n.117) and evenStathopoulos (1992: 54), who characterizes the work of judges as one of shap-ing the law. For Papasteriou (1994: 28-29), there are three different ways inwhich a judge can shape the law: (a) the authoritative interpretation of legalrules that has an indisputably normative character, (b) the application of generalstandards and general legal concepts in particular cases, and (c) the filling-in ofthe gaps in the law with analogical reasoning (see also id. 104-105). See espe-cially Litzeropoulos (1932); see also Papantoniou (1983: 45-46) and Geor-gakopoulos (1997: 476, n.4). An act that was decisive for the future of the rela-tion between law and custom in Greece was the Royal Decree of February 23rd,

1835 (see Pantazopoulos 1945: 473-482) (a custom cannot revoke a written lawexpressing public policy).64 See the divergent, conflicting views of Watt (1997) and Sales (1997) onFrench law. For France, see also the excellent study by Lasser (1995).


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30

application is decisive (Ap. Georgiades 1997: 24-25; for furtheranalysis, see Alexandridou 1987-1988).

The numerous and important general standards65

in the GreekCivil Code rendered Greek Civil law a ius aequumand not strictumto such a degree that the Code was considered internationallyunique.

66However, the use of these standards by the judges should

be based not on subjective criteria or personal opinions and views,but on the general principles of law as they are imprinted in thebody of legislation (from the Constitution to the special laws) andthe widely accepted and respected social norms (Stathopoulos

1992: 63-64; Papasteriou 1994: 8-9). The mainstream approach tostandards in Greek legal scholarship could not find a better descrip-tion than the one provided by Duxbury (1995: 259), writing on theAmerican school of process jurisprudence: Standards are legaldirectives which entail a qualitative or moral appraisal of humanbehavior by reference to supposedly ideal behavior in a comparablesituation.

67 Thus, judges can make the most of the high level of

abstraction and use the wide discretionary authority created by thestandards,

68in order to employ a cost-benefit analysis in their deci-

sions.69

65According to Triantaphyllopoulos (1956: 227), there are eighteen such stan-dards in the Greek Civil Code, for example good faith, trade usage, moralstandards, social purpose and/or economic purpose, serious grounds,reasonable compensation, equitable criteria, etc.66See Stathopoulos (1992: 62-63, 65-66; 1996a: 135, 144-145; 1998: 9), Ze-

pos (1946: 71), Papantoniou (1983: 46-50), Ap. Georgiades (1997: 45) and alsoPantazopoulos (1974i: 177-191) for the history of the standards created by an-cient Greek legal theory (equity, freedom of contracts, unjust enrichment, goodfaith and utility) and their influence on Roman law (Velissaropoulou-Karakosta1993).67For the economic role of standards, see particularly Posner (1990a: 42-51),Kaplow (1992) and also Hillman (1997: 125-171).68

According to Mantzoufas (1954: 21-22), the general standards were insertedby the drafters in order to open a window to economic reality.69 This is not so unusual in Civil law judicial practice, even though cost-

benefit analysis is most often disguised as common sense or pragmatism (e.g.


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(c) The main obstacle to economic analysis in Civil law coun-tries

70 might be the absence of an intellectual tradition similar to

that of Common law countries (i.e. a tradition of respect for indi-vidualism and/or economic efficiency).

71One could point to certain

readily identifiable cultural and historical reasons that have playedan important (negative) role in the prevalence of a concept likewealth-maximization.

72

But we should not overestimate these cul-turally-specific conditions, especially after taking into considera-tion the trends in international economic relations, the globalizationof economic activity (see esp. Gazes 1997: 48-54, 62, 64), the de-

see Papantoniou 1983: 55). See also Schwartz (1997: 12) for Llewellyn's con-current views. The mainstream interpretation theory is teleological (instrumen-talist), in the sense that it emphasizes the objective of the law as a manifestationof its meaning (Liakopoulos 1982: 117; Papantoniou 1983: 61-62; Stathopou-los 1992: 88 and especially Zepos 1955: 11). But see also the discussion inGemtos (1999: 11-12). In the realm of contract law, Greek courts have beenknown to pursue different and quite contradictory objectives: efficiency and so-cial justice (Papantoniou, id.). This contradiction (indeterminacy) is not un-known to American contract law, being the favorite target of scholars of theCritical Legal Studies school. See esp. Kennedy (1982).70The difficulties for the institutionalization of law and economics in Europeare well known, although the situation is rapidly beginning to turn around. Seegenerally Mattei & Pardolesi (1991), Kirchner (1991) and the other articles in

the Symposium (1991). See also Van den Bergh (1992) and Hatzis (2000a). Notsurprisingly, the reaction against Law & Economics in Europe is identical withthe one against the moral menace of Roman law. The account by Whitman(1996) will sound familiar to Law & Economics scholars.71 Which in turn is based mainly on a utilitarian or pragmatic philosophicaltradition. See generally Atiyah (1979) and recently Mattei (1997: 85-88). Seealso the remarks by Zepos (1937: 474-475) and Schwartz (1986: 107, n.1 andalso 1997). For Greece, see generally Zepos (1978: 917), Meinardus (1991) andKitromelides (1994). However, see the work of James Whitman (1990; 1994;1996) on the materialistic, rationalistic and commerce-boosting character ofRoman law.72We should not forget that wealth maximization as a judicial policy guidewas ferociously attacked by the majority of legal scholars in the United States

and by many economists, not because it is so harsh in and of itself, but becauseit sounds harsh, even when it is a pre-existing policy under a different name.But the truth is that it also found many adherents. See Hatzis (1993) for relevantcitations and discussion.


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regulation influx and the discrediting of political theories that couldcreate a hostile environment for the growth of economic analysis.

73

We dare suggest that a Civil law country has even betterprospects for the application of such theories than a Common lawcountry. Currently, in most Civil law countries (at least inEurope),

74any attempt to deregulate economic life and to create an

economically efficient law comes primarily from the state and notfrom the judicial system or the legal scholarship. Thus, the timingis perfect for the sophistication of contract law in these countries.

Specifically, as concerns the European Union, the attempt to

unify the private law of member states in recent years, the publica-tion of tentative drafts (especially the Principles of EuropeanContract Law, in Lando & Beale 1995) and the enactment of manydirectives on contracts issued by the EU, present a golden oppor-tunity for modernization based on economic analysis (cf. Ap.Georgiades 1999: 7-8).

III.An economic theory of contract law should construct le-gal rules that will accommodate -rather than interfere with- existingbusiness practices (Hay et al. 1996). A corollary of this postulateis that the first principle of an economic theory of contracts should

be freedom of contracts.

75

73It is characteristic that the two most distinguished professors of civil law atthe University of Athens, Apostolos Georgiades (1997: 67-68) and MichaelStathopoulos (1998: 10-12), present economic analysis of law in their text-

books. Although both presentations are brief, and to a certain degree critical(esp. by Stacholoulos), the phenomenon can be characterized as nothing short ofextraordinary, since it is the first time that a modern interdisciplinary theory is

presented in a similar "mainstream" textbook and that the authors made no refer-ence to any other grand theory. See further in Hatzis (2000a). See also Papaste-riou (1994: 35-36).74Especially the countries that are current or prospective member-states of the

European Union.75"[O]wnership" without the privilege of transferability is only a limited formof ownership (Goetz 1984: 38). For Posner (1995b: 266), [t]he importantthing for capitalism may be the enforcement of freedom of contract by reasona-


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The great majority of contract theorists in Greece, and incontinental Civil law countries in general, accept the basic principleof freedom of contracts at least initially

76

and with some qualifi-cations. The reason is that this principle is not only a manifestationof freedom, but also of formal equality. Most of them support it(even in its curtailed versions) as an essential basis for the contractlaw of a market economy. All the restrictions they have imposedon this principle are based on the economic considerations of theirproponents (although crudely articulated). The basic argument onthe inequality of the bargaining power of the parties, as well as any

other fairness consideration, is grounded on the ambition to pro-vide the parties with the equality environment of perfect compe-tition (e.g. Zepos 1955: 103; Papantoniou 1983: 261-262, etc., cf.Burrows 1995) and not to promote any specific distributive con-cerns.

77

Very few scholars would straightforwardly support a redis-tributive function for contract law;

78 on the other hand, most of

them would arguably welcome an economic theory (e.g. Papaste-riou 1994: 35-36; Ap. Georgiades 1997: 68; Stathopoulos 1998:10-11) that could soothe their worries over the new economic real-

ity created by the infamous inequality of bargaining power,which precludes the unrestrained enforcement of freedom of con-tracts (Clark 1989: 1726). Legal scholars and ambitious judges,with very limited knowledge of the functioning of a market econ-

bly disinterested judges rather than the exact degree of clarity and coherence ofthe legal rules.76 For Stathopoulos (1996b: 53), the principle of freedom of contracts is thesoul of contract law. For similar views in Germany, see Rolland (1990).77See Gazes (1970: 41): The socialization of Civil law would be its adultera-tion.78 At least in Greece, even radical scholars lack such an ambition. Their dis-

course (or rather especially that) includes economic arguments and a concern forthe distortion of the market economy by market failures. See especially Kazakos(1987: 31-41). See more generally Kronman (1980), Posner (1992: 95, 97-98,263-264) and Harrison (1995: 109-126).


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based on the age-old, albeit successful evolution (and natural se-lection) of legal rules.

82

The economic theory that was developed expressly forCommon law but was grounded on neoclassical economic theory(which is international and not parochial),

83

is not only a perfectintellectual vehicle for understanding the internal structure, the de-velopment and the essence of the Greek Civil Code,

84

but it can alsoprovide the tools needed to modernize a construct that has the po-tential of becoming even more fitting to deal with economic rela-tions.

85Today, these tools cannot be offered by legal scholarship in

the technical doctrinal sense,

86

but by a legal science informed bythe social sciences in general and by economics in particular.87

Any attempts made by Greek legal scholars to place specialemphasis on the problem of disparity in the bargaining power be-tween the parties have failed because of their methodology. Theintervention of the Judge in a contractual relationship is too sensi-

82According to Mahoney (2000), recent finance scholarship finds that countrieswith legal systems based on common law provide better investor protectionsand have more developed financial markets than civil law countries.83

See Mattei & Pardolesi (1991: 266); see also Mattei (1994a: 217-218) andGemtos (1999: 12-13).84 See similar remarks on the usefulness of economic analysis to the Anglo-American Common law of contracts by Howard Gensler: A command of thiseconomic theory not only illuminates contract law for the student by providinga powerful pedagogical paradigm, but is also invaluable for the attorney whomust convince an appellate court of the policy implications and structural meritof an argument. (Gensler 1994: 384).85 The great strength of law and economics [...] lies in its bringing to thestudy of the law a skill (deductive theorizing) that is complementary to the greatinductive concern with facts and distinctions that characterize the best doctrinalscholarship. (Ulen 1996: 791, emphasis by the author). Ulen refers mainly toCommon law, but his description fits Civil law perfectly.86

This is so for many reasons, which cannot and need not be elaborated here.For a classic statement of the end of law's autonomy, see Posner (1987).87 See Cooter (1995) for related views, but from another perspective (after thetriumph of economic analysis of law in the U.S.A.), and Williamson (1996).


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tive a matter to be left to lawyers with no knowledge of economics(see esp. Phourkiotes 1964: 35-36); and this is so because this in-tervention is actually a form of government intervention in thesphere of market activity.

88 If this intervention is to be justified,

especially today, it must be based on the sophisticated market fail-ure analysis of modern microeconomics, as this has been trans-formed by the recent political, economic and technological devel-opments and the progress of economic science over the last twodecades (Hatzis 2002a, also Gemtos 1999: 10-11). Economicanalysis can offer its methodology to lawyers seeking congruence

between their interpretation of legal rules or legal standards and theeconomic reality these rules and standards regulate.Nonetheless, as we observed earlier, the various grand theo-

ries developed for Common law have failed to offer a coherent andstable theoretical framework. One then wonders: what is so differ-ent about an economic theory since it could also lead to a similarfailure?

The fundamental difference between an economic theory anda philosophical or doctrinal theory is that an economic theory aimsat facilitating the exchange of rights according to people's wishes -

and not at regulating contracts according to a moral theory (Fried1981), a political and/or social theory,89a recovered lost philoso-

phical tradition (Gordley 1991), or a doctrinal construction.90 The

aforementioned theories are based on the legitimate need of theo-rists to explain contract law and to incorporate it in a perfect, all-

88 Do not compare the imperfect market against a perfect government. Gov-ernment has its own costs - and fewer self-correcting mechanisms, such as com-

petition. (Easterbrook 1989: 22).89For an example of a theory of contracts based on libertarianism, see Mack(1981) and Rothbard (1982); on socialism, see Wilhelmsson (1993; also 1995);

on feminism, see esp. Frug (1985, 1992).90 These theories are predicated on the futile basis of prediction of judicialdecisions (in Common law) or on a shabby and retrogressive conceptualism (inCivil Law). Characteristic examples are bargain theory and reliance theory.


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inclusive, formalistic conceptual world. Their errors are basicallytwo:

(a) They try to accommodate commercial relationships in apreexisting conceptual framework designed ex ante and not basedon any empirical research. When social and economic reality con-tradicts the theory, they either dismiss the former or modify thetheoretical framework to such an extent that it becomes trivial.

(b) They are inattentive to the needs of the parties as eco-nomic actors.

91All these theories are grounded on concepts created

by philosophers, legal theorists and other eminent scholars who

have intuitively discovered what is moral, liberating, sociallyjust, caring, or relational in the exchanges between people andhave decided that a theory is needed to somehow regulate these ex-changes according to their wise musings. Without denying theirgood intentions or the value and the descriptive (even exegetic)power of their scholarship, we should observe that these theoriesusually overlook the fact that most of the times social actors arethe best judges of where their interests lie (and even if they do not,nothing can assure us that someone else knows better) and conse-quently, they may have long-term unfavorable consequences on the

lives of the actors in question.

92

In the words of one of the leadingGreek civil law scholars, Apostolos Georgiades (1997: 68): Theemployment of methods and concepts borrowed from economicscience can contribute to the law's deliverance from metaphysical

91 For the critique of conceptualism, see Gazes (1995: 37-38) and citationstherein. See also Gemtos (1999: 2) for a perspective that is more congenial toours. According to Judge Posner: The pragmatist thinks that concepts should

be subservient to human need and therefore wants law always to consider thepossibility of adjusting its categories to fit the pract

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