Note: These two examples over-simplify many aspects of the analysis. For instance, Example 2 ignores transaction costs, such as Treadmill’s legal fees in having to bring suit to collect the 50¢ per gear difference between the contract price and the value of the gears to it. Furthermore, our analysis ignores the fact that the parties always have the power to agree to a consensual “buy out” of the contract, so that a damages rule that facilitates breach is not the only way to bring about an efficient result. For instance, even if the rule was that the breaching seller (Component) had to pay 10 times the buyer’s actual damages, Treadmill Co. could agree to surrender its contract rights for, say, $1 per gear, leaving all three parties better off.
Despite the oversimplification inherent in these two examples, they indicate that economic analysis can help:
(1) explain why the standard rules of contract law are what they are; and
(2) in a few instances, perhaps, show why the standard rules should be changed to produce more efficient outcomes.
A. The UCC: In most states, most aspects of contract law are governed by case law (i.e., “common law”), rather than by statutes. But in every state except Louisiana, sales of goods (i.e., sales of things other than land or services) are governed by a statute that is roughly the same in all states, called the Uniform Commercial Code. The UCC has a number of Articles, concerned with a variety of kinds of transactions; here, our principal interest will be in Article 2, which deals with sales of goods.
1. State enactments: The UCC is a “model statute,” originally drafted by, and now periodically updated by, a group called the National Conference of Commissioners of Uniform State Laws (“NCCUSL”). Each state legislature makes its own decision about whether and when to adopt revisions of the various UCC articles proposed by the NCCUSL.
a. 2003 Revision: The NCCUSL drafted a revision of Article 2 in 2003. That revision made some significant changes, especially in the area of electronic commerce. However, this 2003 Revision failed spectacularly in the “marketplace” of state legislatures: no state adopted it. Therefore, the NCCUSL withdrew the 2003 revision in 2011. Consequently, the version of Article 2 in force virtually everywhere in the U.S. as of this writing (early 2012) is the 1990 text.