Harm, Ambiguity, and the Regulation of Illegal Contracts

50 Pages Posted: 22 Dec 2011 Last revised: 28 Feb 2013

See all articles by Adam B. Badawi

Adam B. Badawi

University of California, Berkeley - School of Law

Date Written: December 21, 2011

Abstract

Prohibitions on contract are a common technique for achieving desired policy outcomes. By deeming certain bargains unlawful or contrary to public policy, judges and other policy actors expect to prevent some of the harm that these contracts can create. The presumptive remedy used to accomplish this goal is non-enforcement - which leaves the parties in the position that courts find them. But the standards that govern whether to impose this stern remedy do not place third-party harm at the forefront of the analysis. Consequently, the current framework can underdeter harmful contracts and overdeter contracts that may be harmless. These effects can be exacerbated, moreover, by the pervasive ambiguity that accompanies many contract restrictions. Parties may fear the forfeitures that non-enforcement can impose even when they believe quite strongly that a contemplated contract would be held to be legal.

This Article examines this potential for underdeterrence and overdeterrence by analyzing the incentives that different remedies provide and the relationship of those incentives to the prevention of harm. While non-enforcement has a unique ability to deter, it should not enjoy the status of a presumptive rule - rather its use should be tied to the prevention of harm. Courts should be particularly wary of applying the non-enforcement remedy when ambiguity has the potential to amplify the concerns of overdeterrence. This analysis thus suggests a reformed framework that can minimize some of the problems with the current approach.

Such a framework would expressly acknowledge ex ante expectations about ambiguity and harm in the analysis of potentially illegal contracts. Recognizing these concerns can diminish the disincentive to innovate and the underdeterrence of harm that the current regime promotes. Examples from the regulation of professional licensing and practice and restrictions on trade with rogue nations show how the proposed framework can lead to better outcomes.

Keywords: contracts, law and economics, illegal contracts, public policy

Suggested Citation

Badawi, Adam B., Harm, Ambiguity, and the Regulation of Illegal Contracts (December 21, 2011). 17 Geo. Mason L. Rev. 483 (2010), Washington University in St. Louis Legal Studies Research Paper No. 12-05-18, Available at SSRN: https://ssrn.com/abstract=1975627

Adam B. Badawi (Contact Author)

University of California, Berkeley - School of Law ( email )

215 Boalt Hall
Berkeley, CA 94720-7200
United States

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