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Contracting in modern world

di - 13 Novembre 2012
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But, in the event this guarantee is ineffective, what behaviors should businesses engage in order to prevent opportunistic behaviors, or in any case to ensure compensatory remedies?
Is it possible that this tendency to recapitulate uno actu the conclusion and execution of the contract is the consequence of the ineffectiveness of the legal constraint and of all remedies other than simultaneous exchange to check opportunistic behaviours?
As we said, manifest non-performance and strategic opportunistic behavior can be effectively controlled by the legal constraint. In fact, the legal constraint can discourage opportunistic behaviors, whilst the legal action deriving from this constraint can ensure remedies of restitution and compensation. However, this result is achieved only if these two conditions obtain: 1) that positive law ensures the winning party of a complete indemnification and 2) that there are no ex ante doubts regarding the rights and duties of the parties.
If these two conditions do not obtain, the effectiveness of the legal constraint as antidote to opportunism and of legal action as an instrument for obtaining remedies of restitution are partially compromised.
Now, these two conditions do not seem to obtain at all in today’s legal systems; it may even be utopian to imagine that they may occur in any social system. Generally not all litigation costs are charged to the losing party, and in any case the result of the proceeding almost never seems certain. If we take into account trial costs, costs that have risen in recent years because of the length of the trials themselves and because of the characteristics of the activities that are carried out in them[16], it may be imagined that interest in keeping legal disputes from arising is very strong among companies.
But this preference to avoid legal disputes must necessarily push companies to seek other expedients to ensure performance of the counter-services.
So what are the mechanisms, that seem capable of functioning in today’s society[17]?
The first thing to be considered is the mechanism of reputation. This mechanism requires that operators be able to collect and utilize a great deal of information about the parties making the exchanges. In a world in which information about individuals does not circulate readily, interest in maintaining a good reputation wanes. On this basis, it can be concluded that in today’s large cities, characterized by the fact that individuals move about essentially anonymously, the mechanism of reputation does not seem capable of correcting the opportunistic behaviors of individuals particularly of consumers.
The use of hostages[18] to ensure compliance with contractual commitments can be found only in residual hypotheses, and this scarcity denotes its particular ineffectiveness. For example, some hotel companies normally withhold their customers’ ID documents until all obligations have been met. Rather than responding to the company’s desire to be able to know its customers’ precise data and to be able to rely on possible proof in the event of a legal dispute, this practice seems to respond to the company’s interest in making it worthwhile for the customer to fulfil his obligations, since the loss of his ID documents could involve costs greater than the earnings obtainable through non-performance. The scant use of this expedient seems to be attributable not just to its intrinsic drawbacks but to the fact that there are strong legal limitations in modern law on recourse to it.
The use of collaterals[19] is also not very widespread. Forms of precaution in which we can recognize the characteristics of the technique called “use of collaterals” include, for example, the demands that some companies make that they be able to hold receipts for authorization to credit sums by credit card without indicating the amount being authorized. In this case, the creditor reacts to failure to comply with the obligation (for example, with reference to a fairly widespread circumstance, failure to return a rented car) by taking a sum of money as compensation for damages. However, use of this technique runs up against the legal limit represented by the prohibition against forfeiture agreements.
However, we must note that deposit of the sum of money, which the ability to obtain payment through the credit card amounts to, seems to be destined to become widespread. It must also be noted that knowledge of credit card data by many companies offering goods and services at a distance constitutes an effective deterrent to non-performance or partial performance. From this standpoint, the economic system seems to have thought up an effective remedy to non-payment or to the request for compensation for damages. But, as we said at the start, we will deal only superficially with the changes that the new technologies are bringing us.
In today’s world, the instrument of self-enforcing agreements[20] seems to be entirely unutilised, and this denotes either its excessively cost or a clear ineffectiveness.
Regarding the remedy of creating affective bonds, there is no doubt that in many cases the bonds of friendship among partners are a guarantee that contractual relationships will be respected. However, the large number of consumers with whom each company stipulates contracts certainly makes it difficult to use this expedient.
Finally, there remains the remedy of making exchanges simultaneous, with just a few obligation destined to live after the conclusion of the contract.
This remedy seems to be the one that most effectively and without many drawbacks manages to avoid the risk of opportunistic behaviors, especially that opportunistic component represented by complete non-performance.


16.  The activities carried out in trials are characterized by requiring almost exclusively the use of the work factor, of the judge and of counsel. The costs of these activities are increased in the same way as all “nonprogressive activities.”

17.  The taxonomy used here was developed by A. Kronman, Contract Law and the State of Nature, supra note 1, passim.

18.  The hostage is an asset or an individual having a value for the debtor but having less value for the creditor – consider for example the debtor who gives “as hostage” a young and rather sickly child. In this case the debtor’s interest lies in performing in order to have the loved one back, whereas the creditor’s interest does not lie in holding the hostage and waiving performance of the service. The risk of using hostages lies in the fact that the asset or individual may be of little value for the debtor as well, in which case the latter relinquishes performing the service and leaves the hostage to the creditor, the hostage being of no value for the latter.

19.  Collateral is an asset or individual having value for both parties, creditor and debtor. The use of collateral is much riskier, because if the appraisal is not correct the debtor could leave the collateral to the creditor and not perform, but most of all the creditor might keep the collateral and ask the performance called for in the contract. Consider the case of the debtor having given as collateral an especially beautiful daughter. The creditor might keep the daughter and waive performance of the service.

20.  Self-enforcing agreements are agreements stipulated before a group of citizens, meaning that failure to respect it leads to loss of reputation and hence the possibility of subsequently stipulating new agreements with other associates. In Kronman’s classification, self-enforcing agreements do not share anything with Nash’s equilibria by which the parties may agree to follow specific strategies.

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